Company directors and shareholders are regularly required to vote on important matters of business that the company owns and operates. Issues can arise, however, if a matter is put to vote, there is a deadlock and there is no agreed process in place to resolve the deadlock.
When can a deadlock occur?
A deadlock occurs when there is a disagreement or difference in opinion between parties as to an important decision relating to the company or its business. This usually occurs when there is an equal split in the ownership and decision making of the company. That is, when there are two shareholders who own 50% each of the company’s shares and they each have one director representing them at board level.
A deadlock can occur at a director or shareholder level when a requisite approval level is not reached in relation to a decision or there is no majority result after a vote (i.e. one director / 50% shareholder votes “Yes” on a decision and the other director / 50% shareholder votes “No”.
How can deadlocks be resolved?
The best way to resolve a deadlock is to have agreed and sufficient provisions included in a Shareholder Agreement which clearly set out the process to be followed in these circumstances.
There are various such mechanisms that can be recorded in Shareholder Agreements to address and assist parties in resolving deadlocks. These include, without limitation, the following:
- Chairman casting vote: In the case of a deadlock at board (director) level, the Shareholder Agreement can provide that the Chairman of the directors have a casting vote.
- Best endeavours: A preliminary approach which requires the parties to meet and use their ‘best endeavours’ together to resolve the issue.
- ‘Russian roulette’ terms: If a triggering event occurs, a shareholder can notify the other shareholder that it wishes to sell its shares in the company to the other shareholder (at a price nominated by the selling shareholder). The other party can elect to accept the offer or to sell its shares for the same price (to the shareholder who first made the offer).
- Third party buy out: The parties agree that they will find a suitable third party to purchase 100% of the shares in the company.
- Mediation, arbitration or expert determination: The issue may be referred to an independent third party. This could be an expert in the specific subject area of the dispute or a dispute resolution professional who can assist the parties in resolving the matter.
- Liquidation / Winding Up: A somewhat last resort which may be necessary if the dispute is ongoing and impacting the business or financial state of the company.
What if you do not have a Shareholder Agreement or agreed deadlock procedures?
If there is no Shareholder Agreement in place or the Shareholder Agreement that is in place does not contain sufficient provisions to assist in resolving a deadlock, a director or shareholder might seek relief by commencing legal proceedings. This could involve a party requesting relief from oppressive conduct, alleging a director has breached his or her duties or applying to wind up the company on just and equitable grounds. Such proceedings can be extremely costly and time consuming and can severely impact the business and financial state of the company. Consequently, it is in all parties’ interests to have a written Shareholder Agreement in place which contains clear procedures to be followed when a deadlock arises.
The lawyers of our Commercial & Disputes Division are highly experienced in preparing Shareholder Agreements, in amending existing Shareholder Agreements to incorporate appropriate deadlock provisions and in assisting parties in resolving and litigating director and shareholder disputes.
If you would like to discuss your company structure or a prospective business dispute with one of our commercial lawyers, please don’t hesitate to contact us on (03) 9822 8588 or email@example.com.
Insight written by George Hanger