Mass. SJC Sets Forth New Framework For 'Deadlock' Shareholder Disputes In Private Companies

• Published date: 04 February 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Directors and Officers, Arbitration & Dispute Resolution, Shareholders
• Law Firm: Sheehan Phinney Bass & Green
• Author: Mr Charles Waters

For years, courts in all jurisdictions across the United States wrestled with what constitutes a "deadlock" for a privately-held company, but without attempting to fashion an overall framework for evaluating claims of deadlock. That changed with the Massachusetts Supreme Judicial Court's recent decision in Koshy v. Sachdev, 477 Mass. 759 (2017).

In this precedent-setting case, the SJC ruled in favor an equal owner and director of a Massachusetts software company by interpreting for the first time the Massachusetts Corporate Dissolution Statute (a/k/a the "Deadlock Statute")(G.L. c. 156D ' 14.30). It found that a "true deadlock" existed in the company's operation and management that required court intervention. The Court then ruled that "dissolution" is not the only remedy available, and decided that "lesser remedies" are implied by the statute, such as a court-ordered sale of the company to one of the owners or a third party.

The Court established a four-factor test for determining whether a deadlock exists (as required by the first prong of the statutory criteria for a "true deadlock").

1. Have irreconcilable differences between directors resulted in corporate paralysis - that is, a stalemate in a primary management function of the business?
2. Is this a privately-owned business with evenly-divided ownership and without a ready market for ownership interests - thus, susceptible to deadlock and oppressive tactics associated with deadlock?
3. Is there evidence that one party has manufactured a dispute in order to engineer a deadlock and, thus, force dissolution or ownership change?
4. What is the degree and extent of antipathy and distrust between the deadlocked parties - do they preclude compromise to break the deadlock?

In Koshy, it was clear that a deadlock existed in the corporation - owned in equal percentages by its two founders. They were unable to agree on any major decision, from strategy to hiring, exhibited intense mutual antipathy and distrust over a period of years, and had a history of accusatory lawsuits against each other.

To determine whether the deadlock was irreconcilable, as required by the second prong of the statutory criteria for a "true deadlock," the Court looked for the existence of a mechanism for breaking the deadlock, such as a Shareholder Agreement or Operating Agreement with a buy-sell or other dispute resolution provision. The Court determined there was none, and that the valuation provision contained in the company's Articles of...