Lucy E. Hill of Dentons Cohen & Grigsby. Courtesy photo
Closely-held businesses may face issues of corporate deadlock where control of the business is evenly divided between two owners or two different factions of owners, especially where the owners are also family members. This can often happen after control of a business passes from the founding generation to their children or grandchildren. Yet if the business is still profitable despite the deadlock between the owners, the traditional remedies of an appointment of a custodian or dissolution of the business are typically inappropriate. The appointment of a provisional director—an underutilized and often misunderstood remedy—provides a solution whereby the deadlock can be broken without disrupting the corporation’s day-to-day business.
What Is a Provisional Director?
A provisional director is a neutral third party who is appointed to a corporation’s board of directors for the sole purpose of breaking a stalemate where there are an even number of directors on a board. The provisional director must be a third party who is neither a shareholder or creditor of the company, nor a relative of an owner, officer, or director, in order to ensure her impartiality. A provisional director has the same rights and powers as an ordinary director of the corporation and does not have the heightened powers of a custodian or receiver to control the company on her own. Instead, the provisional director essentially acts as a tie-breaking director on a board, providing an unofficial “mediating” function between the other directors by participating in board meetings where issues are analyzed. Typically, a provisional director is appointed to decide a particular issue or issues, as specified in the court’s order of appointment. After informing herself about the issue or issues upon which the board is deadlocked, she may cast a vote along with the other directors, creating a majority vote in support of one course of action, at which time her service as a provisional director is no longer needed.
