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Resolving disputes in Shareholders Agreements by using “Deadlock” clauses

“Deadlock” is a situation where shareholders have an irreconcilable conflict; where neither shareholder has a majority (usually each holding 50% of the shares in a company) and a conflict arises over the management of the business. In order to resolve such situations, a procedure (or deadlock clause) can be set out in the shareholders agreement.

There are a number of approaches that can be adopted, a selection of which appear below.

  • The Chairman has a casting vote where there is an equal number of votes for and against a proposed resolution. This may unlock a deadlock, but it gives one party the advantage, which effectively negates the concept of joint control.
  • A “Russian Roulette” clause, entitling one shareholder to buy the other shareholder’s shares at a stipulated price, but with the other shareholder having the right to buy out the first shareholder’s shares at the same price per share.
  • An “auction” clause, whereby either or both shareholders may “bid” for the shares of the company.
  • Arbitration or expert resolution. This is really only suitable for a limited range of disputed matters, which are more factual in nature (e.g. a dispute over the valuation of intangible contributions to the company by either party).
  • A clause requiring the parties to join in liquidating the company and to share the costs and expenses of liquidation. Liquidation is not attractive if a large element of the value of the business is “goodwill” and depends on it’s continuing as a going concern.

The danger of including a pre-determined deadlock resolution procedure is that one party may deliberately try to engineer a deadlock and the resolution procedures usually favour the shareholder with the greater financial resources. If the agreement contains no deadlock procedures and a deadlock arises, it would still be open to a shareholder to apply for the company to be wound up on the just and equitable ground under the Insolvency Act 1986.

Alternatively it may have a remedy for unfair prejudice under the Companies Act 2006. However, it is unwise to rely on statutory remedies as the outcome of legal proceedings is not always predictable.

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