This will be a multi-post blog entry. This sixth post discusses how a business deadlock can impose indirect personal liability on business owners for certain obligations that may be neglected because the business is at crossroads between multiple owners.
Post 6 – Personal Liability Pursuant To a Business Deadlock
Even though powers and duties of running the business may be appropriately delegated, business deadlocks may still occur. One or more owners may disagree with the other on certain decisions such as merging (sale or acquisition); consolidating with or acquiring a competitor; going public; incurring significant capital expenditures; pursuing business expansion endeavors; or other decisions, strategic or operational. Some of these disagreements may cause a business to come to a standstill. At this point, if deadlocks are not resolved, the owners may become subject to personal liability for the business on some occasions.
A deadlock or disagreement may make business owners adversarial against each other. Although owners are protected from business debts and liabilities generally, they are still answerable for obligations which owners have guaranteed in their personal capacity, e.g. guarantee to lessor for office facilities, or bank guarantees for repayment of business loans. Business owners are also responsible for paying taxes e.g. payroll tax, sales tax, etc. to the government. As a result of the deadlock if the Business starts to gradually underperform and runs in losses, it might in extreme circumstances even begin relying on withheld tax funds for its regular expenses. In such circumstances, where the Business failed to pay the government the taxes withheld, or failed to file tax forms, owners can be held personally liable. For unpaid taxes, tax authorities may attach Business assets in a sale to recover dues from the sale proceeds. If only one owner is authorized to sign Business checks, such owner in a deadlock may choose not to sign intentionally, and the other owner may not be able to change signatories to bank accounts. These may disrupt suppliers’ supply of materials and ultimately affect sales and revenues.
In order to avoid deadlocks, the Texas Business Organizations Code permits shareholders of a corporation to enter into an agreement to “resolve any issue about which there is a deadlock among the directors, shareholders or other persons authorized to manage the corporation”. Governing documents of some Businesses may not provide for a mechanism to resolve deadlock matters at all. Other businesses may in fact, be operating based on oral understanding (e.g. where family members are owners). While it is not certain that deadlock provisions will lead to a resolution, it is nonetheless a step in the right direction towards a process the courts may likely uphold.
Our next post will discuss personal liability of owners because of transfer of shares or securities in violation of the Securities Act of 1933 and state blue sky laws.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or [email protected].
 See §21.101 of TBOC