Deadlock with Mediation Clause
(Operating Agreement) (LLC)

Summary

This non-jurisdictional deadlock with mediation clause can be included in a limited liability company's (LLC) operating agreement. This clause includes practical guidance, drafting notes, and alternate clauses. In the event of a dispute between the members of an LLC resulting in an impasse, and absent a means by which the members may resolve the dispute, the LLC may be forced into a judicial liquidation in accordance with the state LLC law's default rules. Ironically, this may be the unfortunate result even if the members wish to carry on the LLC's business as usual. Worse still, the forced liquidation will cause a "fire sale" of the LLC's assets. This may cause a diminution in the value of members' cumulative capital account balances (i.e., representing their membership interests) left to them after the payment of taxes and debts. Some LLC operating agreements deal with the issue of fundamental disputes by way of a put provision—a forced sale of a recalcitrant member's membership interest to the remaining members. Of course, this is fertile territory for majority exploitation. Rather than a put provision of any variety, it will generally be advantageous for members to establish a mechanism for dealing with disputes—whether they be fundamental or routine—between the members in order to break the deadlock so that the LLC can progress its business affairs. For such purposes, it will generally be optimal for disputes to be handled by mediation before, or instead of, resorting to litigation or even arbitration. For a full listing of key content covering commercial real estate, see First Year Associate Resource Kit: Real Estate. For more information on LLCs generally, see Limited Liability Companies.