Including the decision-making clause in a business partnership agreement is a best practice. It establishes a framework to be followed when making daily decisions to ensure business operations flow smoothly.
Here is what to know about this clause:
What’s included in it?
Typically, the decision-making clause categorizes decisions. These include day-to-day operations, major/strategic decisions and fundamental changes. Then, it outlines how decisions in each category will be made.
For instance, partners can have individual authority when it comes to day-to-day operations, such as daily scheduling, ordering office supplies, renewing software subscriptions and approving daily social media posts.
An agreement can require a majority vote when making a major/strategic decision, like securing large business loans and entering into long-term leases. The decision-making clause defines voting rights. It specifies the voting power each owner possesses (voting weight) and the total voting weight required to approve a specific action (voting threshold).
A partnership with a 50/50 ownership structure, which means neither partner has the voting power to outvote the other, should define how deadlocks will be handled.
Fundamental changes, such as bringing on a new partner, removing an existing partner, selling business assets/intellectual property and altering the original partnership agreement, usually require unanimous consent (100% agreement from all partners).
How disputes related to decision-making happen
It’s not uncommon for business partners to have disputes related to decision-making. This can happen when a partner individually decides on a matter that requires consent from the other partners or when an agreement has vague language/lacks a tie-breaking mechanism for resolving deadlocks.
For example, when a contract does not clearly define “day-to-day operations” and “major decisions,” a partner may overstep their authority. They may hire/fire an employee or change software systems when such decisions require voting.
Disputes stemming from decision-making can risk a business partnership. If you are facing such an issue, consider legal guidance to protect your business.