Deadlock Clause

This Deadlock Clause is designed to be inserted into a Shareholders’ Agreement and sets out a definitive method of bringing an end to an impasse.

It includes a number of possible deadlock-resolution methods, one of which the shareholders should agree before executing a Shareholders’ Agreement.

This clause can be included at the drafting stage or adopted as an agreed amendment to an existing Shareholders’ Agreement.

When deadlock may arise and why this clause is used

In private companies with equally owned shares, such as where two shareholders each hold 50%, votes may be split evenly with no prospect of agreement being reached.

Where there is no mechanism to deal with this scenario, the only solution may sometimes be to wind up the company.

To conserve the business as a going concern, a deadlock clause may provide one or more methods of breaking the deadlock.

Deadlock-resolution methods covered by this clause

• “Russian roulette” procedure.
• A requirement for the parties to use all reasonable endeavours to reach a settlement.
• An option for the Chairman to resolve the dispute.
• Appointment of an independent arbitrator.
• “Texas shoot-out” procedure.
• Voluntary winding up of the company.

“Russian roulette” option

Under the “Russian roulette” option, one deadlocked party serves a notice on the other.

The notice specifies a cash price at which it values half the shares in the company, and the receiving party then has the option either to buy the other party out or to sell out to the other party at that specified price.

Settlement period and further options

If the alternative option in Sub-Clause 1.2 is chosen, the parties must use all reasonable endeavours to come to a settlement.

If a settlement is not reached within 10 days, then Sub-Clause 1.3 provides four possible options for resolving the deadlock, one of which should be chosen.

The “Texas shoot-out” option involves each party sending a sealed cash bid to an umpire within a specified number of days stating the maximum price at which it is willing to buy the other party’s shares. The bids are opened together by the umpire; the highest bid “wins” and that bidder must buy (and the other party must sell) the other party’s shares in the company.

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