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Breaking the Tie: Understanding Deadlock Provisions in Shareholder Agreements

by | Jul 1, 2019

If you’re in the process of drafting a shareholder agreement for your company, you’ve made a wise choice. The contract will be instrumental in outlining the rights and responsibilities of each shareholder and director, as well as the running of your company. A well-written shareholder agreement should include a “deadlock provision.” What exactly is a deadlock provision, and why do you need one? Let’s take a look at the facts.

What is a deadlock provision?

Let’s say the company’s directors have a dispute that they cannot resolve. When your shareholders vote on the matter, it’s possible for them to create a deadlock, meaning they’ve cast an equal number of votes for and against the decision. It could also mean that they’ve failed to reach a unanimous vote, if one was required. A deadlock provision is an element of dispute resolution, and it outlines the process you’ll follow in the event of a deadlock.

How do they help?

A deadlock provision will provide your company with a set of instructions for dealing with deadlocks. When your company experiences a deadlock—like when your shareholders can’t agree on the election of directors, or when they get stuck on management decisions—your provision will show you the way out. Issues may come up about the company’s strategy, direction, management, and more, so a deadlock provision may be able to help in many ways.

Who needs a deadlock provision?

Any corporation can benefit from a deadlock provision. Disagreements can always come up in your company, whether you expect them or not, and a strong contract can protect you and your company from the consequences of a serious dispute. That said, shareholder disputes tend to happen more often when there are only 2 or 4 co-founders in a company (or any even number of owners).

What types of provisions are there?

When it comes to deadlock provisions, there are several options available to your company:

  • With a mediation clause, each side can work to resolve the matter with the help of a neutral party. Similarly, you can add a meeting clause to make shareholders come together and resolve the issue in an extended meeting.
  • An arbitration clause is a little different because it calls an independent outside expert to look at the facts of your dispute. That person will then have the power to impose a decision.
  • You can use an auction deadlock clause to allow one or more shareholders to bid on the shares held by other shareholders.
  • When there are more than two shareholders, a chairman deadlock clause gives one shareholder the power to become Chairman and make a decision to end the deadlock.
  • As a last resort, a liquidation deadlock clause will force the shareholders to liquidate the business together.

What’s the best possible tiebreaker for your company? You should contact a skilled attorney for the answer. At Campbell Law Group, we have extensive experience in the realm of shareholders’ disputes. We will make sure your shareholder agreement is perfectly suited to the unique needs of your company.

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