Our 50/50 Partnership Is Deadlocked. How Do Texas Courts Resolve It?

Why 50/50 is the hardest structure to unwind

Equal ownership works until the first real disagreement. Then every rule designed for majorities fails. In a Texas LLC with no agreement to the contrary, each member has an equal vote (section 101.354) and ordinary decisions require a majority (section 101.355). With two members, a majority means both. A voluntary winding up requires a majority vote of all members (section 101.552), so neither 50 percent owner can dissolve the company alone. Neither can withdraw or expel the other (section 101.107). The statute, applied to two equal owners who disagree, produces a company that cannot decide anything and cannot end.

That is why the first place to look is the agreement, and the second is the courthouse, and why almost every deadlock ends in a negotiated buyout somewhere between the two.

Read the agreement for a tie-breaker

Company and partnership agreements written by someone who had seen a deadlock usually contain one of these:

• A shotgun (buy-sell) clause. One owner names a price per unit; the other must either buy at that price or sell at it. It is self-enforcing because the one naming the price does not know which side of it he will end up on.
• A tie-breaking vote. A named third person, an advisory board member or a designated manager decides specified disputed matters.
• Mandatory mediation or arbitration of deadlocks. Sometimes with the arbitrator empowered to decide the business question itself.
• Dissolution or auction on deadlock. If the owners fail to agree on a listed matter for a stated period, the company is sold or wound up by a defined process.
• Put or call rights. One side can require the other to buy, or can buy the other out, at a formula or appraised price after a triggering event.

These clauses are contracts and Texas courts enforce them as written. If yours has one, the dispute is mostly about following the procedure correctly and valuing the interest. For the valuation fight, see how valuation disputes between partners are decided.

What a court can do when the agreement is silent

Judicial winding up: section 11.314

A district court in the county of the company's registered office or principal place of business may order the winding up and termination of a Texas partnership or LLC on application by an owner if it determines that the economic purpose of the entity is likely to be unreasonably frustrated, that another owner has engaged in conduct relating to the business that makes it not reasonably practicable to carry on the business with that owner, or that it is not reasonably practicable to carry on the business in conformity with its governing documents. A true deadlock, in which the two owners cannot approve a budget, hire a manager or renew a lease, fits the third ground and often the first. The remedy is the end of the company: assets are sold, creditors paid and the balance distributed. Nobody wins the business.

Receivership: section 11.404

In an action by an owner, a court may appoint a receiver for the entity's property and business if the governing persons are deadlocked in the management of the entity's affairs, the owners are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of it. The court must also find that circumstances necessitate a receiver to conserve the property and avoid damage to interested parties and that all other legal and equitable remedies are inadequate. A receiver displaces both owners from management for as long as the court keeps him in place, at the company's expense. For corporations, section 11.404(a)(1)(E) adds a separate ground: shareholders deadlocked in voting power who have failed for at least two years to elect successor directors. Both remedies are explained in asking a court to appoint a receiver or dissolve a Texas company.

What a court cannot do

Order one owner to buy the other out. In Ritchie v. Rupe (Tex. 2014) the Supreme Court of Texas held that the receivership statute creates a single remedy, rehabilitative receivership, and does not authorize a court-ordered buyout. Nor does any provision of the Code let a judge pick the better owner and hand him the company. Texas courts end deadlocked companies or supervise them; they do not resolve the underlying business disagreement.

Example

Suppose two equal members of a Richardson dental-lab LLC have not agreed on anything for eight months. One wants to buy a milling machine; the other refuses to sign the loan. The operating agreement has no tie-breaker. The lease is up for renewal and neither member will sign alone. The member who wants to continue sends a records demand and a written proposal to buy the other out at an appraised price. When that is refused, she files a petition under section 11.314 alleging that the business cannot be carried on in conformity with the governing documents and asks, alternatively, for a receiver under section 11.404 to sign the lease renewal. The petition does not get her the company. It does present her partner with a choice between a court-run winding up that destroys both their investments and the appraised buyout on the table. Most partners take the buyout.

General partnerships have an extra exit

If the business is a general partnership rather than an LLC, section 11.057(d) gives a partner a route the LLC statute does not. In a partnership with no fixed duration or undertaking, a partner may request winding up, and the partnership must wind up on the 60th day after notice unless a majority-in-interest of the partners denies the request or agrees to continue. 'Majority-in-interest' means partners owning more than 50 percent of the profits interest (section 11.057(f)). In a 50/50 partnership, the other partner alone is not a majority-in-interest, so one partner's request will lead to winding up unless the two reach a different agreement, such as a buyout. Partners can also withdraw under section 152.501 and have their interest redeemed at fair value, with the partnership continuing. Whether your two-person business is an LLC or a general partnership therefore changes your bargaining position considerably.

What deadlock costs while you wait

A deadlocked company drifts. Leases lapse, key hires go elsewhere, vendors notice unpaid invoices nobody will approve, and the owners' time goes to the fight. Section 11.404's 'irreparable injury' requirement is, in practice, a description of what happens to a business whose owners stop deciding. The owner who documents the drift (the unsigned renewal, the lost bid, the resignations) builds both the receivership case and the buyout argument at the same time.

A path that usually works

1. Read the agreement for any tie-breaker, buy-sell or dispute clause and follow it exactly.
2. Send a written records demand so both sides value the company from the same numbers.
3. Put a specific buyout proposal in writing, with a valuation method and payment terms, and propose mediation; see how business mediation works.
4. If refused, file under section 11.314 and, where the facts support it, request a receiver under section 11.404 for the decisions that cannot wait.
5. Keep negotiating. The petition is the deadline that most deadlocks were missing.

A litigator's role is to make each step credible to the other side: a demand that complies with the statute, a valuation that will hold up, and a petition that a judge would grant. Tina Wysk represents owners on both sides of partnership disputes in Dallas state and federal courts and in arbitration.