Shareholder deadlock

Shareholder deadlock

Shareholder deadlock commonly arises where two shareholders each own 50% of a company and cannot agree on decisions at board or shareholder level. The company may become unable to make decisions, particularly where the shareholders’ agreement and articles of association contain no effective deadlock provisions.

This often occurs where two individuals establish a joint venture, combining complementary skills and resources. Disagreements can eventually hinder business performance, restrict growth and cause profitable opportunities to be lost.

Here are some possible solutions.

Shareholder deadlock with no shareholder agreement

Where no effective deadlock mechanism exists, possible solutions include involving an independent third party:

• Appointing a non-executive director to help resolve board-level deadlock.
• Introducing a new class of shares with carefully defined voting rights, where legally and commercially appropriate.
• Appointing an independent expert to determine a specific dispute, with the decision binding where agreed.

A shareholders’ agreement can address deadlock in advance. Once a dispute has escalated, however, negotiating a new agreement may be difficult.

Possible outcomes to 50:50 shareholder disputes

• Shareholder exits – Where trust has broken down, one shareholder may sell their shares to the other. This can resolve the deadlock without court proceedings and may allow the parties to agree appropriate post-sale restrictions.
• Buyback in the name of the company – The company may buy back the departing shareholder’s shares if the statutory requirements and funding conditions are met. The parties should agree the price, timing and conditions in advance. Tax treatment depends on the circumstances, and Business Asset Disposal Relief is not automatic.
• Sale of the company due to deadlock – A shareholder may seek a third-party buyer, subject to any transfer restrictions in the articles or shareholders’ agreement. The directors must exercise their powers properly when considering registration of a transfer.
• Court action – If negotiations fail, court proceedings may be necessary. The potential costs, delays and consequences should be considered before taking this step.

How relevant is shareholder conduct in deadlock disputes?

A shareholder may bring an unfair prejudice petition where the conduct of the company’s affairs unfairly prejudices their interests as a member.

For example, a director may refuse to support a dividend in a profitable company as leverage in negotiations over a shareholder’s exit. Depending on the circumstances, the court may order one party to purchase the other’s shares.

Where a buyout is contemplated, an independent valuation may help the parties reach agreement and may be relevant to the court’s consideration of costs.

Can the company be wound up due to deadlock?

Yes. A court may wind up a company where it is just and equitable to do so. Deadlock may support such an application where the company cannot function and the circumstances justify this remedy.

Winding up is a drastic step, so alternatives should be considered first. Shareholders should also remain professional in their communications, as emails and other records may later become evidence.

Shareholder deadlock - how we can help

Even a minor disagreement can escalate into a dispute that prevents a company from making decisions and damages its business.

We help shareholders and directors assess their options, negotiate practical solutions and work towards resolving deadlock while protecting their commercial interests.