How to Avoid Legal Deadlock in Operating Agreements and Corporate Bylaws
Background
Deadlocks in LLCs and corporations often stem from gaps in operating agreements and bylaws rather than deliberate obstruction. In Kundrun v. AMCI Group, LLC (“Kundrun”), the Delaware Chancery Court addressed a board impasse that left company counsel unable to determine whose authority governed legal decisions. The Court held that vague governance provisions risk pulling entity counsel into member disputes and underscored the need for strict neutrality. Kundrun serves as a reminder that governing documents must clearly delineate managerial authority, voting procedures, and the scope of counsel’s representation to avoid operational paralysis when internal conflicts arise.
Table of Contents
Why Operating Agreements and Bylaws Must Define Authority Clearly
Operating agreements and bylaws must clearly define managerial authority to prevent deadlocks. Ambiguous titles—such as “Executive Chairman”—invite disputes when the scope of that role is not tied to specific decision-making powers. In Kundrun, the LLC Agreement granted the Executive Chairman “full powers of the board” for “day-to-day operations” but left extraordinary actions undefined, triggering disagreement over which decisions required joint approval. To avoid similar conflicts, governance documents should delineate routine operational authority (e.g., vendor contracts) from extraordinary actions (e.g., issuing equity, incurring long-term debt, initiating litigation, or amending governance terms). They may require written consent from a designated manager or chair to break potential impasses. Clear authority boundaries minimize ambiguity and reduce the risk of internal stalemates.
How to Prevent Counsel Neutrality Conflicts
The Kundrun decision also underscores that company counsel must remain neutral during internal disputes, as counsel’s duty runs to the entity, not to any individual owner. Yet when governing documents are unclear, counsel may be pressured to take sides or face conflicting instructions from competing decision-makers. To prevent this, operating agreements and bylaws should expressly state that counsel represents the entity alone and establish procedures for obtaining legal advice when authority is contested. Deadlock-resolution mechanisms—such as mediation, expedited arbitration, appointment of a neutral manager, or designation of an independent director—should likewise be built into the governance structure. These provisions provide a defined path for resolving disputes and ensure that corporate counsel is not left navigating competing directives without guidance.
Building Effective Deadlock-Resolution Clauses
Crafting deadlock-resolution clauses requires a focus on preventing disputes rather than merely managing them after they occur. A strong checklist includes:
defining decision-making thresholds with clear categories—specifying which actions require majority, supermajority, or unanimous approval—and tailoring each threshold to the decision’s impact on the company;
establishing explicit authority limits for officers to prevent overreach, such as the disputed conduct attributed to Mende in Kundrun;
embedding a structured dispute-resolution pathway (e.g., mediation → arbitration → dissolution) to ensure that if earlier steps fail, the company still has a viable mechanism to move forward; and
detailing how counsel is selected, when independent counsel must be appointed, and how communications should occur during periods of internal conflict.
These measures create clarity, reduce risk, and safeguard your business from costly governance paralysis. By proactively defining authority, representation, and dispute-resolution procedures, companies can stop minor disagreements from spiraling into operational standstills and preserve long-term stability.
At The West Firm, our attorneys are ready to help you strengthen your organization’s foundation. Whether you need comprehensive LLC operating agreements or corporate bylaws designed to prevent deadlock, we craft governance documents that protect your business and support its growth. Reach out to our team to get started.
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A tie-breaking provision protects multi-member LLCs by establishing a predetermined mechanism for resolving disputes, thereby preserving operational continuity and preventing organizational standstills.
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If bylaws fail to specify who controls legal counsel, corporate counsel is obligated to remain neutral during a board deadlock, which can leave counsel without clear direction in navigating competing instructions.
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It is essential that operating agreements clearly define terms such as “day-to-day operations” to minimize ambiguity and prevent disputes over authority that can give rise to internal conflicts.
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