Breaking the Deadlock

Company deadlock usually arises in companies whose shareholders each own 50% of the shares in the company (or in equal proportions if there are more than one shareholder) and those shareholders are not able to reach a decision on any matter of significance for the company and, none of them will budge from their position.

In the absence of any specific provision in the company’s constitutional documents, such as Articles of Association or separate Shareholder Agreements which would deal with this type of deadlock scenario, the only real remedy available to the shareholder will be to seek a Court Direction or Order. 

In such a scenario it is possible for a shareholder, or a group of shareholders to place the company into liquidation, by applying to the Court for a Winding-Up Petition on “just and equitable grounds” They present a just and equitable Winding-Up Petition, supported by evidence of the intractable position the company has reached and the Court will make an Order.

In theory, the Court will expect the Petitioner to present evidence of the steps they have taken in relation to their efforts to break the deadlock.  This may include details of any process the shareholders have gone through either by way of an external mediator or, the consideration of one or other of the shareholders buying the others out. 

The petitioning party would need to show that there has been a complete breakdown in relations between the parties with the result that decisions cannot be reached concerning the company’s business. 

If the evidence clearly demonstrates that the relationship of trust and confidence has irretrievably broken down between the shareholders, then that can be sufficient for the Court to make an Order to wind-up the company on just and equitable grounds. 

This is somewhat drastic and a final step in relation to the company as the only Order the Court is likely to make is a Winding-up Order which will bring the business conducted by that company to an end the process can be expensive, time-consuming, stressful and damage any prospect of ongoing business.

It is much better for businesses to seek to mitigate against the prospect of any form of deadlock occurring in the management of the company. 

The most appropriate mitigation is to ensure that there is provision in either the Articles of Association or in a Shareholders’ Agreement to deal with deadlock situations or, at least to put mechanisms in place to determine the way in which any such shareholder disputes could be dealt with in a timely and predetermined manner e.g. typical mechanisms which can be put in place can include a Chairman’s casting vote, reference to mediation, arbitration or to an expert, an obligation, within the Articles, or Shareholders’ Agreement in relation to either party being allowed to sell shares (together with a valuation mechanism) and/or some form of mechanism for compulsory buyouts or sellouts in a deadlock situation.

It is always better to be pre-emptive and take steps to avoid the situation. Shareholder litigation is not just expensive it can have a serious detrimental effect on the company health and wellbeing.

Tom Esler is a Commercial Litigation Partner with over 28 years’ experience of dealing with shareholder disputes. 

tom.esler@mfgsolicitors.com