Business, Workplace & Commercial Law

What types of deadlock clauses are used in Shareholders’ Agreements?

May, 2014

By Gavin Hanrahan

Legal Disclaimer

This presentation is offered for general information

purposes only. It does not constitute specific legal

advice or opinion. You should not act or rely upon any

of the information contained within this seminar

without seeking the advice of a qualified solicitor who

specialises in the particular area of expertise and

jurisdiction that you require.

Introduction

A ‘deadlock’ occurs when shareholders have a major disagreement or dispute related to the management of a business; where neither shareholder has the majority vote, i.e. if 4 shareholders disagree on an issue and they each hold 25% of the company’s shares.

To resolve a ‘deadlock’, shareholders follow a procedure set out within their shareholders’ agreement (deadlock clause).

Introduction

There are numerous procedures that can be employed to resolve a ‘deadlock’, which is why no two deadlock clauses are the same.

The following slides outline some of the most common examples of deadlock clauses.

1. Russian Roulette Clause

This clause entitles one or more shareholders, who agree on a resolution to the issue, to buy the other shareholders shares out at an agreed upon price, but also entitles the other shareholders to buy them out at the same price. If nobody agrees to sell at this price, this clause can escalate to allow counteroffers, until a suitable price is reached.

This solution typically forces the exit of a number of shareholders and favours shareholders who are in a stronger financial position.

2. Auction Deadlock Clause

This clause entitles one or more shareholders to “bid” for the other shareholders shares.

3. Arbitration Deadlock Clause

When a disagreement occurs, an independent outside expert is called in to look at the facts. The expert has the power to impose a solution and make a decision.

All shareholders will equally share the cost of securing an expert.

This clause is most suitable inmatters are factual or technicalin nature.

4. Chairman Deadlock Clause

This clause entitles one of the shareholders to become the Chairman in the event of a deadlock. The Chairman has the casting vote and has the power to make a decision, effectively negating the concept of joint control.

This clause is only suitable when there are more than two shareholders.

5. Liquidation Deadlock Clause

This clause forces liquidation in the event of a deadlock. The shareholders equally share in the costs and expenses of liquidating the business. This solution tends to occur if the issue has been in deadlock for a significant period of time.

This clause is only suitable in serious situations whereby the business is on its last legs.

6. Meeting Deadlock Clause

This clause states that all shareholders (or if the shareholders are themselves companies, their Managing Directors) must meet either personally or electronically for an extended meeting in an attempt to resolve the issue and come to an agreement, which is usually achieved through compromise.

7. Mediation Deadlock Clause

This clause is similar to the meeting clause above, but has the additional component of an independent mediator who facilitates and controls the meeting, with the goal of reaching an amicable compromise.

Unlike the arbitration clause, the mediator has no power to impose a solution or make a decision.

The shareholders share the cost of the mediator.

8. Fairest Deadlock Clause

This clause forces all of the shareholder/s to make a sealed offer to buy the shares of the other shareholder/s. All of the offers made are given to a third party who must decide which offer is the ‘fairest’. The fairest offer is the one that must be accepted.

This solution typically forces the exit of a number of shareholders and favours shareholders who are in a stronger financial position.

9. 100% Buyout Deadlock Clause

This clause is similar to the chairman clause in that it entitles one of the shareholders to be authorised (for a set period of time) to locate and contract with a buyer for 100% of the company’s shares, for the same price per share.

If the nominated shareholder fails to secure a buyer, the authority to find a buyer moves to another shareholder.

This continues until all shareholders have had a chance to secure a buyer. If no buyer can be found, another solution must be sought.

Turnbull Hill Lawyers – Contact Us

If you have any further questions about Shareholders’ Agreements or you'd like to discuss a related matter, please do not hesitate to call Gavin Hanrahan on: 1800 994 279 or email him.

We will endeavour to respond to your enquiry within 24 hours.