Not unlike other marriages, companies are generally formed by close business partners who trust one another to act in each other’s and the new company’s best interest. That is, of course, until they don’t. So, what happens when companies are hopelessly deadlocked so that business is stymied? In such circumstances, neither of the distressed business partners may like the answer.
Business owners may be surprised to learn that courts can (and will) appoint a complete stranger to take over the feuding partners’ business. While lawsuits can take years, courts can be quick to appoint a neutral, third party to do what the disagreeable partners cannot. Either according to statutory authority or their inherent equitable powers, courts will empower disinterested neutrals to perform delegated functions of the business.
Beyond the nature of the appointment (equitable or statutory), it is equally as important to consider whether the neutral acts as a “special master,” “monitor,” or “receiver.” Special masters typically assist courts with the composition of detailed orders or evidentiary hearings on detailed preliminary factual matters, and monitors typically supervise parties’ compliance with court orders. The “receiver,” however, is the most powerful judicially appointed manager, who assumes the power to run a company and serves all the traditional functions of management of a company, literally standing in the shoes of management.
Equally as disconcerting, courts retain the power to select a neutral without regard to the preferences of the fractured partners or a judicially vetted list of nominees. And perhaps most problematic of all, the business partners will be ordered to pay for the neutral’s expenses (and, of course, the neutral’s attorney) if the business does not generate sufficient revenue. Thus, not only can irreconcilable partners lose control over the company they created, they also may be awarded the privilege of paying someone else to do what they were unable to peacefully do themselves—run their business.
The best way to avoid the stranger in the boardroom is to work through challenges together; but in an impasse, it may be necessary for you and your lawyer to seek the appointment of a neutral, fend off the appointment, or at the very least limit the scope and, most importantly, the expense.
Combining strong Nevada roots with a boutique litigation practice, Frank Flansburg is a trial lawyer representing global companies, small businesses, entrepreneurs and individuals in and out of court. He can be reached at fflansburg@bhfs.com or 702.802.2205.