Breaking Management Deadlocks in LLCs

Deadlocks can occur in a limited liability company.  Consider the following example:

Linda and Lori are both managers of a manager-managed LLC that is owned 50% by Linda’s family and 50% by Lori’s family.  The LLC owns a valuable piece of real estate.  The LLC’s Operating Agreement requires a 51% vote of members to sell assets.  It also requires a 51% vote of members to remove or appoint a manager.  A prospective buyer makes what appears to be an attractive offer to buy the property.  Linda feels the time is right to sell the real estate but Lori feels that it would be better to hold the real estate for further appreciation.  Thus, one wants to sell and the other wants to hold. They try to resolve their differences on this issue but cannot reach a compromise.

In this situation, Linda cannot cause the sale to happen since a 51% vote is needed.  Also, Linda’s family cannot remove Lori as a manager since a 51% vote is needed.  A stalemate or deadlock is the result.

Utah LLC law (Utah Code Sec. 48-2c-1210 and 1211) contains a procedure for breaking deadlocks in LLC management.  That procedure allows any LLC member to file a lawsuit to dissolve the LLC where:

  • the managers are deadlocked in management of LLC affairs,
  • the members are unable to break the deadlock, and
  • irreparable injury to the LLC is threatened or being suffered or the business of the LLC can no longer by conducted to the advantage of the members generally because of the deadlock.

If the court orders the LLC to be dissolved, the affairs of the LLC would then be wound up, meaning that, under court supervision, the LLC’s assets would be sold, the LLC’s debts would be paid and the remaining assets would be distributed to the members according to their percentage interests in the LLC.

Another possible way to break the deadlock is to remove one of the managers by court action. Utah LLC law (48-2c-804(6)(e)). However, this remedy is only available where the manager “…engaged in fraudulent or dishonest conduct or gross abuse of authority with respect to the LLC and removal is in the best interests of the LLC.”

If the LLC were member-managed with 50/50 ownership in Linda and Lori and the deadlock was due to their holding equal voting power so that neither could, on her own, cause the sale of LLC assets or the removal of the other, the same procedure is available.  Either of them could file a lawsuit to dissolve the LLC, but only after the deadlock had continued for at least 6 months.

In a court proceeding to break a deadlock, the court could appoint a receiver to take possession of property owned by the LLC.  Such receiver would also have the power to “…dispose of all … of the assets of the [LLC] .. at a public or private sale, if authorized by the court.”

To deal with deadlocks in management of an LLC, advice and assistance of a competent lawyer is essential.