We have discussed previously some of the reasons why your company should have a shareholders agreement, including that a shareholders agreement can set out a clear and tailored process for dealing with disputes amongst shareholders – see our article ‘5 Reasons Why You Shouldn’t Do Business Without a Shareholders Agreement’.
Disputes amongst shareholders are more likely to arise when there are an even number of shareholders with equal voting power and they are unable to reach a majority decision on a particular matter because 50% of the shareholders vote one way and 50% vote the other way – this is referred to as a ‘deadlock’.
Deadlocks can cause a company’s operations to come to a sudden standstill and pose a significant risk to companies whose constituent documents do not address what should happen if one occurs. Therefore, it is vital that a shareholders agreement contains a mechanism for resolving deadlocks.
We have summarised below some common deadlock mechanisms.
1. Casting Vote
One of the shareholders is granted a casting (i.e. deciding) vote, in order to determine the matter and break the deadlock.
2. Put/Call Option
A put option provides a shareholder with the right to sell their shares to the other shareholder/s at a predetermined price (for example, the fair market value of the shares at the date of the deadlock).
A call option on the other hand provides a shareholder with the right to purchase the shares of the other shareholder/s at a predetermined price.
3. Russian Roulette
Any shareholder (the ‘offeror’) may offer to sell its shares in the company to the other shareholder/s (‘the offeree/s’) at a certain price. The offeree/s may then either buy the offeror’s shares at that price or require the offeror to instead purchase the offeree’s shares at that certain price.
4. Blind Auction
This is a variation on the Russian roulette procedure whereby each shareholder lodges a sealed bid for the purchase of the other shareholders’ shares and the highest bidder must then purchase the other shareholders’ shares in the company at the price offered in the sealed bid.
5. Mediation
The shareholders must engage in mediation whereby a non-biased third party mediates the discussions and negotiations amongst the shareholders with a view to resolving the deadlock.
Each option has its pros and cons. Therefore, which mechanism for resolving deadlocks is right for your company will depend on the relevant circumstances and the relationship between the shareholders.
If you need more information about resolving deadlocks or shareholders agreements more broadly, please contact Denise Wightman, Partner, or Brighid Virtue, Lawyer, to discuss.
