Deadlock — where shareholders with equal or blocking voting power cannot agree on a key decision — can paralyse a company at exactly the moment it needs to act. The mechanisms to resolve it only work if they are agreed in advance.
Common mechanisms
- A casting vote held by an agreed independent chairman for defined categories of decision
- A Russian roulette or shotgun clause, where one party offers to buy or sell at a price they set, and the other must choose which
- Mandatory referral to mediation or expert determination before any other step
- A defined buy-out mechanism triggered automatically once deadlock persists beyond a stated period
Why these need to be agreed early
A deadlock mechanism negotiated while the relationship is functioning is far more likely to be fair to both sides than one negotiated after the relationship has already broken down, when neither party is inclined to compromise.
Where no mechanism exists
Without an agreed mechanism, resolving a deadlock generally falls back on the statutory remedies for oppression and mismanagement, or in extreme cases, a petition to wind up the company on just and equitable grounds — both slower and more damaging routes than a mechanism agreed in advance.
What to do next
If your shareholders’ agreement has no deadlock mechanism, or an untested one, review it before it is actually needed.