What types of deadlock clauses are used in Shareholder Agreements?

Written on the 22 May 2014 by Gavin Hanrahan


A 'deadlock' occurs when shareholders have a major disagreement or dispute related to the management of a business; where neither shareholder has the majority vote, i.e. if 4 shareholders disagree on an issue and they each hold 25% of the company's shares. To resolve a 'deadlock', shareholders follow a procedure set out within their shareholders' agreement (deadlock clause).

There are numerous procedures that can be employed to resolve a 'deadlock', which is why no two deadlock clauses are the same. Examples of common deadlock clause types include:

1. Russian Roulette Deadlock Clause

This clause entitles one or more shareholders, who agree on a resolution to the issue, to buy the other shareholders shares out at an agreed upon price, but also entitles the other shareholders to buy them out at the same price. If nobody agrees to sell at this price, this clause can escalate to allow counteroffers, until a suitable price is reached. This solution typically forces the exit of a number of shareholders and favours shareholders who are in a stronger financial position.

2. Auction Deadlock Clause

This clause entitles one or more shareholders to "bid" for the other shareholders shares.

3. Arbitration Deadlock Clause

When a disagreement occurs, an independent outside expert is called in to look at the facts. The expert has the power to impose a solution and make a decision. All shareholders will equally share the cost of securing an expert. This clause is most suitable in matters are factual or technical in nature.

4. Chairman Deadlock Clause

This clause entitles one of the shareholders to become the Chairman in the event of a deadlock. The Chairman has the casting vote and has the power to make a decision, effectively negating the concept of joint control. This clause is only suitable when there are more than two shareholders.

5. Liquidation Deadlock Clause

This clause forces liquidation in the event of a deadlock. The shareholders equally share in the costs and expenses of liquidating the business. This solution tends to occur if the issue has been in deadlock for a significant period of time. This clause is only suitable in serious situations whereby the business is on its last legs.

6. Meeting Deadlock Clause

This clause states that all shareholders (or if the shareholders are themselves companies, their Managing Directors) must meet either personally or electronically for an extended meeting in an attempt to resolve the issue and come to an agreement, which is usually achieved through compromise.

7. Mediation Deadlock Clause

This clause is similar to the meeting clause above, but has the additional component of an independent mediator who facilitates and controls the meeting, with the goal of reaching an amicable compromise. Unlike the arbitration clause, the mediator has no power to impose a solution or make a decision. The shareholders share the cost of the mediator.

8. Fairest Deadlock Clause

This clause forces all of the shareholder/s to make a sealed offer to buy the shares of the other shareholder/s. All of the offers made are given to a third party who must decide which offer is the 'fairest'. The fairest offer is the one that must be accepted. This solution typically forces the exit of a number of shareholders and favours shareholders who are in a stronger financial position.

9. 100% Buyout Deadlock Clause

This clause is similar to the chairman clause in that it entitles one of the shareholders to be authorised (for a set period of time) to locate and contract with a buyer for 100% of the company's shares, for the same price per share. If the nominated shareholder fails to secure a buyer, the authority to find a buyer moves to another shareholder. This continues until all shareholders have had a chance to secure a buyer. If no buyer can be found, another solution must be sought.

Related ArticleThe most important provision of a shareholders' agreement is the exit provision


Shareholders Agreement Questionnaire


The clauses listed above are just some of the common solutions to deadlocks. Due to the sheer number of clause types and the complexities involved in choosing the correct one to use for your company, it is recommended that you seek assistance from a legal professional before deciding upon which clause/s to include in your shareholder agreement.


If you have any questions relating to shareholders agreements or you would like to talk to me about another business law matter, please call me on 1800 994 279 or email me. I'll endeavour to respond to your enquiry within 24 hours.

- Gavin Hanrahan
   Managing Partner

Gavin Hanrahan - Franchise Lawyer in NSW

 


Author: Gavin Hanrahan
About: Gavin Hanrahan is the Managing Partner of Turnbull Hill Lawyers and the Partner-in-Charge of our Business, Commercial & Workplace Team. He advises clients on a broad range of business, workplace and HR issues, ranging from employment contracts to risk management. As one of the leading business lawyers in NSW, Gavin speaks to local business owners every day and understands both the needs and difficulties of launching, managing and growing a business. Our clients appreciate his practical, personal and solutions-orientated approach and his ability to respond to legal issues that are currently impacting businesses all over NSW.
Connect via: Twitter Google+ LinkedIn

Contact Us Now

We respond in 24 hours or less

Please provide details regarding your matter so we can assist you

Enquiry Form

Fill out our enquiry form and we'll respond within 24 hours

Please tick to verify that you are not a spam

 
Publications

What happens when you burn down your house during a separation to avoid transferring it to your ex?

What happens when you burn down your property during a property settlement to avoid transferring it to your former partner? When fire fighters attended upon a property in Wollongong in the early hours of 4 August 2016 they discovered that the owner was sitting with his dog calmly watching his house going up in flames. Mr Krste Kovaces...

Read More ...

A step by step guide to obtaining a separation agreement

A step by step guide to obtaining a separation agreement from Turnbull Hill Lawyers A separation agreement (known as a binding financial agreement (or BFA) under the Family Law Act) is a legally binding document that formalises your property settlement. As a separation agreement is legally binding, each party must carefully co...

Read More ...

Significant Changes Are Proposed to Criminal Law Sentencing & Offender Supervision

On 9 May 2017, the NSW Governments announced a series of significant justice reforms that aim to deliver justice more quickly to communities and victims, strengthen sentencing options and ensure offenders are rigorously supervised when serving community orders. Sentencing Reform It has been proposed that: Suspended sentenc...

Read More ...

How does the 2017 Budget affect the family law Courts?

The government has made several announcements that will affect the family law system in the 2017 budget. These include a new initiative to help resolve disputes, additional family law consultants, and a trial of domestic violence units. The Australian Law Reform Commission has been asked to conduct a comprehensive review of the family law sys...

Read More ...

7 Hot Tips for Buying Property Off the Plan

7 Hot Tips for Buying Property Off the Plan from Turnbull Hill Lawyers 1. Lock in the right price by doing market research When you buy property 'off the plan' you are purchasing it many months, sometimes years, in advance before construction has been completed sometimes even before construction has started. For this r...

Read More ...

| 1 2 3 4 5 6 7 8 9 10 | Next


Events
Blogs
"Thank you very much for the smooth settlement o...

M & J Booth

Liability limited by a scheme approved under Professional Standards Legislation

enquiries@turnbullhill.com.au