Deadlock Clause

This Deadlock Clause has been created to be inserted into a Shareholders’ Agreement and provides one definitive method of bringing an end to an impasse. It contains a number of possible methods, one of which the shareholders should agree on prior to executing a Shareholder Agreement. This Deadlock Clause can be inserted either at the drafting stage or as an agreed amendment to an existing Shareholders’ Agreement.

Often in private companies with equally owned shares, such as a company with two shareholders who each own a 50% share, situations can arise where votes are split down the middle and with no prospect of an agreement being reached. In these deadlock situations where there are no mechanisms in place to deal with the scenario, sometimes the only solution is to wind up the company. In order to conserve the business as a going concern a deadlock clause will provide either one or a range of methods of breaking the deadlock.

Words and phrases in square brackets can be deleted, and signify “either/or” choices.

This Deadlock Clause is in open format. Either enter the requisite details in the highlighted fields or adjust the wording to suit your purposes.

At Sub-Clause 1.2, the first option in square brackets allows for the deadlock to be resolved via a process called “Russian roulette”. This dramatic sounding procedure involves one of the deadlocked parties serving a notice on the other party. The party who issues the notice specifies a cash price at which it values half the shares in the Company. The party receiving the notice then has the option to either buy the other party out, or sell out to the other party, at the specified price.

If this option is chosen, all the other wording in square brackets should be deleted. If the second option in Sub-Clause 1.2 is chosen, then the parties must use all reasonable endeavours to come to a settlement. If a settlement is not reached within 10 days, then there are four possible options for resolving the deadlock in Sub-Clause 1.3, of which one should be chosen. The first allows for the Chairman to resolve the dispute; the second allows for the appointment of an independent arbitrator. The third option is known as a “Texas shoot-out” whereby each party sends a sealed cash bid to an umpire within a specified number of days stating the maximum price at which they are willing to buy the shares of the other party. The sealed bids are opened together by the umpire, and the highest sealed bid "wins", and that bidder must then buy (and the "loser" must sell) the other party’s shares in the Company. The final option is the most dramatic in that it involves the voluntary winding up of the Company.

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