Deadlock Clause – Shareholders Agreement

What is a deadlock clause in a shareholders agreement and when should you use it?

A Deadlock Clause is a clause generally found in a Shareholders’ Agreement which determines how disagreements on key issues are to be resolved.

It is extremely helpful in companies where shares are equally owned between shareholders; for example, where two shareholders equally own 50% shares in the company.

In this scenario when a disagreement arises between the shareholders that prevents the company from running properly a deadlock is said to have been reached.

A Deadlock Clause can help the shareholders reach an agreement by providing a mechanism for the resolution of the problem.

This Deadlock Clause template sets out a number of options for the resolution of a deadlock.

The main options are:

• Arbitration.
• the Chairman having a casting vote.
• Russian Roulette where one of the two shareholders serves a sale notice to the other shareholder, specifying a price at which it values its half share in the company. The shareholder receiving the notice then has the option to either buy the other party out, or sell out to the other party, at that price.
• Texas Shoot-out where each shareholder sends a sealed all-cash bid to an umpire stating the price at which they are willing to buy out the other party. The sealed bids are opened together, and the highest sealed bid “wins”, and that bidder must then buy (and the “loser” must sell) the other half share in the company.
• Finally, if no solution has been reached then the last option is the Voluntary Winding Up of the company.

In the absence of a Deadlock Clause when there is a deadlock the only option would be the winding up of the company.

Therefore a Deadlock Clause is paramount because when two shareholders are unable to agree on a key issue it provides a method to preserve the business as a going concern, thus saving the company.

This Deadlock Clause can be inserted in a Shareholders’ Agreement either at the drafting stage or later on as an amendment to an existing Shareholders’ Agreement.

What else might you need?

To get a better understanding of shareholder’s Agreements and how they work we’ve got some great guides to help you:

Shareholders Agreements

Protect your interests with a shareholders agreement

We’ve also got a useful checklist to help you when drafting your shareholders agreement.