The Provisional Director Remedy for Corporate Deadlock: A Proposed Model Statute
2003; Washington and Lee University School of Law; Volume: 60; Issue: 1 Linguagem: Inglês
ISSN
1942-6658
Autores Tópico(s)Corporate Governance and Law
ResumoIntroductionIt is widely known that no feuds are bitter those between family members or close friends. The conflict can be particularly destructive when the dispute involves money and power. In the business context, friends or family members who enter into business together may begin on good terms, but their confidence in each other and in the bright prospects for the business may blind them to the risks of future dissension.1 Although their relationship fellow investors may be cooperative initially, it can often turn acrimonious and result in serious corporate deadlock.2 In the most severe cases, irreconcilable differences may require that the business be dissolved even though the parties have operated it successfully for many years.3Shareholder conflicts that result in deadlock pose some of the most difficult challenges for corporations and for corporate law. Although courts have the authority to dissolve corporations that parties can no longer operate effectively due to deadlock,5 other less extreme measures are available. Many states have statutes that specifically authorize courts to order any one of several alternative remedies in cases of shareholder or director deadlock,6 including the following: the purchase of the shares of one shareholder by another, the removal of officers or directors, or an accounting with respect to any matter in dispute.7 The purpose of many of these alternate forms of relief is to preserve the ongoing operations of the business.One particular remedy that courts may grant in lieu of dissolution is the appointment of a provisional director. The provisional director is a neutral third party appointed by the court to the board of directors to act a tie-breaking director.8 Provisional directors possess the same rights and powers of ordinary directors to vote at meetings. The role of the provisional director is to vote to break deadlocks in the corporation.9 Part of the value of provisional directors lies in their ability to mediate between hostile factions and to encourage both sides to consider new ideas and alternatives for resolving disputes amicably.10 As a result, the provisional director remedy is a unique dispute-settling arrangement with characteristics akin to those of compulsory arbitration, mediation, and conciliation.11 To date over twenty states have adopted statutes that specifically empower courts to appoint provisional directors in cases of corporate deadlock,12 and courts in all states have the equitable power to order the designation of an additional director in lieu of dissolution.13The provisional director approach to resolving corporate deadlock raises difficult questions about both the autonomy rights of shareholders and the ability of a court appointee to interfere with private business. One may argue that as a matter of principle no state or public interest justifies taking away the right to veto corporate decisions from either of the deadlocked factions.14 However, at the same time, judicial intervention to alleviate the paralytic effects of deadlock may arguably be necessary to uphold the foundations of private ordering.15Perhaps the underlying complexity of the provisional director remedy explains the widely divergent treatment of the remedy in different jurisdictions. The discord among various states, courts, and authorities concerning the appointment of provisional directors is striking. For example, the Model Statutory Close Corporation Supplement to the Model Business Corporation Act (MBCA-CC) provides for the appointment of provisional directors one remedy of many for corporate deadlock.16 California allows courts to appoint provisional directors in both public and private corporations.17 Delaware affords the provisional director remedy only to the limited number of corporations that affirmatively elect close corporation status.18 In Ohio, a court may appoint a provisional director only if the corporation's articles of incorporation expressly provide for it. …
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