What is a Deadlock Provision?

When joining forces as partners in a group health care practice, doctors and dentists will normally make every effort to cover all the bases concerning the working provisions of their organization. Whether they set up as a professional corporation or operate as a partnership (or limited liability company outside of California), their partnership agreement, if properly drawn, must cover a multitude of potential situations and setbacks.

Unfortunately, not all relationships are made in heaven. Even the happiest marriages will sometimes fail. What happens, though, when partners to a business relationship reach an unsolvable impasse? In the absence of an equitable agreement, can they break up their alliance yet keep the enterprise afloat?

The Deadlock Provision

Deadlock ProvisionA well-drafted partnership agreement will contain specifications for handling every potential eventuality. That includes dealing with disagreements about fundamental issues and even being prepared to dissolve their partnership if it should come to that. This is where the deadlock provision comes in.

The partnership agreement of any enterprise must contain various provisions to ensure its continued operation regardless of any intrusive situations that could potentially arise. A deadlock provision is just one of many strategies that can ultimately perform the vital task of resolving disagreements that might otherwise result in your partnership’s entire dissolution.

This deadlock provision clause will begin by defining a number of key matters relating to the partnership’s fundamental control and management. When and if the members of the operation should find themselves trapped in an ongoing and apparently unresolvable disagreement concerning any of these matters, they will be said to have reached a deadlock.

Mediation under a Deadlock Provision

A deadlock provision will insist that the dissenting parties engage in mediation in the hopes of reaching an amicable solution. If they cannot, the matter’s resolution will fall to the mediator’s discretion. When choosing a mediator the partners should consider someone who is geographically close to their location and someone with a very good understanding of the practice of dentistry or medicine.

If the two sides are unable to come to an understanding on the matter, termination provisions will ordinarily kick in. These are the focal point of most deadlock provisions. They have but one main objective: to keep the enterprise alive by permitting one opposing party to relinquish his stake while receiving, in most cases, a fair and just compensation.

The Types of Deadlock Termination Provision

The stipulations of any termination provision can vary. Many simply allow the recalcitrant member to quietly withdraw from the partnership. Alternatively, members of the group can agree to take the matter to binding arbitration or simply let the flip of a coin resolve their disagreements.

In the most extreme situations, any of a variety of termination provisions may apply. These basically consist of buy-sell agreements that specify the means by which one partner in the business will buy out the other’s ownership. This extreme measure is the last resort and will normally arise only after every other measure has failed.

Although the different varieties of termination provision can run the gamut, a certain number have become standard practice in partnership dissolutions. These provisions include:

  • Deterrence. Meant to dissuade any partner from commencing the process, this type of termination clause deems a deadlock to have arisen when one side informs the other of its existence. The initiating party usually must then either buy out the other’s share in the enterprise at a markup of 125 percent or sell his own to the other side at 75 percent of its worth.
  • Multiple choice. This form of termination provision offers a series of options upon which one of the opposing parties will have to agree. This can sometimes lead to a compromise, but if it does not, imposing the most appropriate alternative could demand the assistance of an arbitrator.
  • The Texas or Mexican shootout. Each of these solutions involves sending sealed bids to a mediator. In the Texas variety, each submission will state the price at which the bidder is willing to buy out the other person’s shares. The highest bid wins. In the Mexican variety, on the other hand, both party’s sealed bids will indicate the lowest price at which they would be willing to sell their share. The higher bidder will then buy out the lower one at the price he has stated in his sealed proposal.
  • Russian roulette. In this variety of termination provision, one party serves the other with notice in which he names the all-cash price he considers to equal the value of his interest in the entity. The recipient of this notice can then choose either to buy the initiator’s shares or to sell him or her his own at the stipulated price.

Summary of the Deadlock Provision

The contents of the deadlock provisions can vary in accordance with the actual key issues upon which their drafters hope to ensure a consensus. When these provisions work as designed, the business should continue to operate. The existence of the deadlock provisions will not only enable the medical partnership or dental partnership to continue functioning but also serve to discourage disagreements that could prove costly and harmful.

When drawing up partnership agreements for their newly formed partnerships, doctors, dentists, and other medical professionals will find the inclusion of deadlock provisions a vital means of ensuring the healthy continuation of their business operation. If you would like help in drafting deadlock provisions, call Odgers Law Group for assistance.