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If you own an interest, with others, in a business, make sure that you know the consequences of what you sign.
One of the biggest challenges of any small business is deciding who makes what decisions. The owners of an electronics company in Guilford County adopted bylaws which required a unanimous vote by the three owners for any business decision. All meetings required all three owners for a quorum, and the bylaws could be amended only by a unanimous vote.
There came a time when the three owners disagreed. They hired lawyers. The lawyers exchanged letters. One of the owners sued the other two and the corporation. The two hired a lawyer to represent them and the corporation.
The North Carolina Business Court took the extraordinary step of disqualifying the lawyer the two hired, ruling that the two owners did not have authority under the bylaws to hire a lawyer. The corporation was left paralyzed – unable to defend itself in court. Gwaltney v. Gwaltney, 2017 NCBC 12 (Feb. 8, 2017).
These bylaws were exceptionally strict, but by no means is this the only company whose organizing documents require unanimity for decisions. The organizational documents of every business entity need to make clear how business decisions are made and how to resolve the disputes that are bound to arise. Requiring that business decisions be unanimous is in effect insisting that the owners always work out their differences. Judges do not like to make business decisions. Nor are they well equipped to do it. Most judges are not business people.
The requirement for unanimity reminds us of King Solomon’s decision to cut the disputed baby in half. The wise ruler counted on the two sides finding a solution to avoid killing the child. Business owners at odds with each other sometimes believe that taking a tough position in court somehow will make the other side see the light. Our many years of experience in business law, however, tell us it does not often work out that way.
It should not take the wisdom of Solomon to understand that when people are going into business together, it is critically important to ensure that the documents are well crafted, and that the owners’ expectations are well-founded.
Author: Jesse Jones, Attorney
The McIntosh Law Firm, P.C.