Navigating 50/50 deadlock in business partnerships

Tom Esler, commercial litigation partner at mfg Solicitors, based at the firm’s Kidderminster office

A friend and I started our Company on a joint and equal basis, with 50/50 shareholding. We have no shareholder’s agreement.

Our Company is very successful. Over the years our relationship has broken down to the extent that we now find it very difficult to work together or indeed to have any semblance of a working relationship to the extent that we have stopped having directors or shareholder meetings due to the acrimony.

I want to sell the Company to extract full value, but my Co shareholder will not agree. What can I do?

It is not uncommon to find that many SME companies have been set up on a joint shareholding basis. A 50/50 shareholding arrangement can provide a balance of control, as each shareholder has an equal say in company decisions.

This is a reasonable sentiment at the inception of a Company as it is normal that founding shareholders usually have the same aspirations at the outset.

However, it can often leads to deadlock in the decision-making process when the shareholders cannot reach an agreement.

To avoid a company deadlock position, several strategies can be employed. One method is to give the chair of the board of directors a casting vote, which can break a deadlock at the board level. However, this method is often not acceptable as it negates the concept of joint control.

A possible mitigation for this in a 50:50 joint venture is to rotate the appointment of the chair with a casting vote between the parties.

Another strategy is to refer disputed matters to an agreed expert or arbitrator, which can unlock deadlock at both board and shareholder levels.

However, this method is usually inappropriate for business decisions as the arbitrator may not have sufficient knowledge of the business and it may not resolve fundamental differences between the parties.

A third approach is to give an independent third party the balance of power as an additional non-executive director. This can unlock deadlock at the board level, but the feasibility of this method depends on the ability to find a suitable person with appropriate business expertise who is acceptable to all shareholders.

It is always best to consider these strategies in the context of a shareholders agreement, at the inception of the Company. A properly drafted shareholder agreement negotiated and finalised at the outset of the shareholder
relationship sets out the basis rules of the shareholder relationship and should contain agreement on how to deal with difficult decisions, disputes, and inevitably potential deadlock.

In the event of an insoluble deadlock, it may be necessary to consider winding up the company, on just and equitable grounds. Shareholders may petition for the winding up of a company on the grounds that it would be just and equitable, particularly in cases where there is a complete breakdown in relations between the parties leading to a deadlock.

Just and equitable winding up of a company is a remedy of last resort, often invoked in the context of shareholder disputes, members of a company who meet certain conditions may petition for the compulsory winding up of the
company on the ground that it would be just and equitable to do so.

The court’s discretion to make a winding up order is extremely wide, including deadlock, justifiable loss of confidence due to mismanagement, irretrievable breakdown in trust and confidence at a “quasi partnership” company, and exclusion from management of a quasi-partnership company.

However, if the court believes that the petitioner is entitled to relief either by winding up the company or by some other means and that in the absence of any other remedy, it would be just and equitable that the company should be wound up, it shall so order.

This does not apply if the court is also of the opinion that some other remedy is available to the petitioner, and it is unreasonable of the petitioner to seek the winding up of the company rather than pursuing that other remedy.

For more, please contact Tom Esler by calling 01562 820181 or by emailing tom.esler@mfgsolicitors.com. Readers can also visit www.mfgsolicitors.com.