When Fair is Fair to No One
by Attorney Charles D. “Chuck” Gabriel *
How many times as children did we say: “one for you, one for me; one for you, one for me?” We have been taught that 50/50 splits are the fair way to go. Everyone is equal, and that’s how everyone gets along. However, in the business setting, whether a partnership or a closely held corporation, 50/50 is a calculus for disaster.
The real question ought to be “who is the tie‐breaker?” or “who decides?” In a corporation or a business that is operated by two equal partners or owners, decisions ultimately must be unanimous. And reality tells us that unanimity can be as elusive as the butterfly of love.
Just within the last year our office has handled a number of business conflicts that at their heart are the result of 50/50 ownership interests. These issues range from simple disputes over new business direction all the way to employee‐director misconduct where one owner was misappropriating both funds and business opportunities from the corporation.
In the case of a pure partnership, one partner can often act unilaterally to protect him or herself. In a corporate structure however, where it takes action by a board of directors or a vote of the stockholders, a 50/50 split is a recipe for stalemate and non‐action. Corporate paralysis, as the phrase suggests, can be costly if not devastating. When disagreements go unabated or become personal between the owners, the options are limited and often lead to litigation. Litigation between corporate owners is expensive, time consuming, and rarely satisfying. Unfortunately it often becomes the only viable option to resolve disputes between intransigent positions.
So, what can be done? There are two solutions commonly advanced to address the problem. The first is to grant one owner a 1% or greater majority in the stock ownership, thus allowing that person to make the decisions by majority vote; the downside is the minority stockholder can often be frozen out and seriously harmed, subject to certain fiduciary obligations of the majority owner. This solution requires great faith and personal trust, and some very careful prophylactic drafting.
The second alternative is based in the operating agreement between the two 50/50 owners. An operating agreement can include provisions whereby one or the other, or perhaps a neutral third party/officer of the corporation, becomes the “tie breaker.” This tie breaker appointment can be defined in terms of certain issues or it can alternate between years, allowing for the tie breaker position to be held every other year or on some agreed‐upon schedule. Perhaps then “fair is fair” and owners of businesses can return to the youthful days of “one for you, one for me; one for you, one for me.”
*Attorney Chuck Gabriel is the Managing Member of Pierce, Gabriel & Parker, LLC, a Civil Litigation Law Firm in Alpharetta, Ga. He can be reached at 678.735.5900 or by eMail at CDGabriel@PGP‐Law.com.
