Deadlocked companies…..how do you break the deadlock?

5 September, 2016

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What happens when you own 50% of a company and the only other 50% shareholder / director will not agree anything?  In such a situation the company is effectively deadlocked and cannot properly function.  How do you break the deadlock?

There is rarely an easy answer to this but here are the main routes to resolving the situation, in descending order of attractiveness and ascending order of cost and complexity:

Reconciliation

Sort out your differences. Try getting a third party in (for example a mediator) with a view to addressing the issues and finding a way for you both to work together in the future.

Negotiate an exit

Agree a deal under which one party buys out the other or one party takes a back seat in the business (becoming a “sleeping partner”). There may even be a mechanism to achieve this in a shareholders agreement or the articles of association of the company (‘the articles’).

Pull any obvious legal levers

If discussions don’t bear fruit – have a look at the articles or any shareholders agreement and see what provisions are in there that may assist. For example, many shareholders agreements contain mechanisms to force a buyout of shares in the event of deadlock.  Just the threat of activating such provisions may encourage the other party back to the table to negotiate.

Re-structure / de-merge

Is it possible to split the business or re-structure it with new investors to avoid the deadlock situation?

Wind up the company

In the absence of other options consider winding up the company, dividing the assets and going your separate ways. If the other party will not agree to put the company into liquidation then deadlock is a ground to apply to the court under s.122(1)(g) of the Insolvency Act 1986 for the company to be wound up on just and equitable grounds.

Apply to the court for the other shareholder to buy you out

In some circumstances the deadlock may be “unfair” to one shareholder in which case they have the right to apply to the court under s.994 of the Companies Act 2006 on the basis that their rights as a shareholder have been unfairly prejudiced. The typical remedy sought is that the wrongdoing shareholder is ordered to buy out the other at a fair value.

Apply for an administration order

In some circumstances it may possible to appoint an administrator who will then have powers to try and rescue the company as a going concern or realise property.

In summary, there are legal mechanisms to resolve deadlock but often they are a rather blunt (and very expensive) instrument. The best solution is a negotiated one, but sometimes you have to threaten the use of a blunt instrument to get everybody to the table.