What is a shareholder deadlock?

What is a shareholder deadlock?

You and your best friend have a brilliant business idea and decide to give Musk a run for his money. So, you decide to split everything down the middle. Fair right? No problems, right? Think twice.

Given the somewhat changeable nature of business operations and decision making, shareholder disputes are not uncommon. Shareholders holding 50% each in a Company may lead to a shareholder deadlock. A dispute and a resulting deadlock can stem from a gap in expectations between the business direction and what was conveyed to the shareholders.

A shareholder deadlock can occur when shareholders owning an equal percentage of shares have a disagreement.

In the absence of a shareholders’ agreement, it may be impossible to make any decisions at all.

There are three ways to resolve a deadlock:
1.    Mediation/Arbitration to arrive at a decision or impose a decision
2.    Appointment of a non-executive director to help break the deadlock
3.    New Shareholder

There may be cases where none of the three abovementioned options works.

In these cases:

  • There could be a just and equitable winding up of the company, where neither party wants to sell their shares.
  • If one party is willing to sell their shares and the other party can afford to purchase those shares, a share buyback could occur.
  • One party may sell their shares to a third party (there is still a chance of the other party refusing to accept the share transfer if there are good reasons).
  • As a last resort, a court action can be commenced. The court would either order for the company to be wound up or order an independent evaluation of shares.

Solution:

Think of a mechanism to allow for a deciding vote in such situations. It could be that shareholders hold the deciding vote in alternate years. Or maybe make reference to a third party to decide and have that be binding.

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact us at:  info@silvesterlegal.com.

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