The Provisional Director Remedy for Corporate Deadlock: A Proposed Model Statute

Abstract

The article discusses a unique remedy for shareholder and director deadlock within corporations: the appointment of provisional directors to corporate boards. Provisional directors are neutral third parties who are appointed by courts to act temporarily as tie-breaking directors in corporations paralyzed by deadlock. Provisional directors possess the same rights and powers of ordinary directors to vote at meetings. The provisional director remedy is a valuable dispute resolution mechanism that shares similarities with other alternative forms of dispute resolution, including arbitration, mediation, and a hybrid form called mediation-arbitration.

The appointment of a provisional director raises concerns about both the autonomy rights of shareholders and the propriety of a court-appointee's undue interference with private business. These issues, in turn, pose deeper theoretical questions about the nature of corporations and the difficult balance between public and private ordering regimes. The discord among various states, courts, and authorities concerning the appointment of provisional directors is striking. The considerable variance with which states and courts have construed the provisional director remedy reflect deep confusion over the remedy's functions, goals, and limits.

Although much attention has been given to other forms of judicial relief for deadlock, such as dissolution and buy-out, this article provides a comprehensive analysis of the provisional director approach and formulates a new statutory model for adoption in states' corporations codes. The proposed statute is designed to give courts and legislatures a clearer image of the role that provisional directors can and should play in helping companies resolve the internecine boardroom battles that produce deadlock. Close corporations in particular may benefit from the use of provisional directors.

Keywords: corporations, close corporations, shareholder deadlock, board deadlock, provisional director, dispute resolution, arbitration, mediation, shareholder autonomy, private ordering, dissolution

JEL Classification: D21, D23, G34, K2, K20, K22, K4, K41, M14