Company Deadlock – The Options

Stephen Downie
August 7, 2013

Commercial disputes are an unfortunate reality of company life, made all the more challenging when faced with the unenviable situation of company deadlock.
In a deadlock scenario, parties of equal standing in a company (i.e. 50:50 director shareholders) are essentially unable to make any decision on behalf of the company as neither party has the required majority to pass a company resolution.
The key to avoiding deadlock is parties acting swiftly and in a decisive manner to bring the matter to resolution in order to avoid any long term problems. Options can include:
Shareholders’ Agreement.
Negotiated settlement and Valuations.
Mediation.
Litigation.
We consider each of the above options in turn, as follows:
Shareholders’ Agreement
Outlining a shareholder’s rights clearly and early on in discussions is often the best way to avoid deadlock arising. These rights can be documented in a shareholders’ agreement, being a private contract between all or some of the shareholders dealing with short and long term company management, financing and strategy often pre-empting potential problems that may arise within a company and ensuring that deadlock can be avoided altogether or, failing that, outlining what should happen if deadlock should arise.
Negotiated Settlement and Valuations
If a deadlock arises, it can be broken by one party making a conscious and positive effort to provide a pragmatic solution to avoid the company being torn apart and wound up; solutions can include restructuring, a buyout proposal by either party or a company’s solvent liquidation. A negotiated settlement can avoid the need for litigation and can bring about a private and workable resolution. It is necessary, however, that you understand your legal entitlements and alternatives before commencing a negotiation to ensure that you are negotiating from a position of strength.
Valuations of individual shareholdings can often be a stumbling block on the road to resolution as there are a variety of different ways in which a party’s minority or majority shareholding can be valued. It is therefore vital for parties to obtain an accurate professional valuation of the shareholdings they hold so that an informed judgement can be made on the options available on a company buyout or restructure.
Mediation
An alternative to a heavily negotiated settlement may be formal mediation. Mediation is a process where a skilled 3rd party can attempt to bring the parties together to explore and assist in finding a mutually acceptable resolution to the deadlock and to enable the company’s ongoing trading.
Mediation can be arranged at short notice and is overseen by an individual independent to the parties providing a binding legal agreement on the day of the mediation. When used successfully, mediations can provide the parties with certainty on their future dealings and can break existing deadlocks.
Litigation
In the event that parties are either unable or unwilling to break the deadlock then formal court intervention may be required. There are a number of litigation options available such as issuing a claim or injunction proceedings for a breach of director’s statutory duties, a derivative action by a minority shareholder (in respect of a claim on behalf of the company itself) or an unfair prejudice action (where a shareholder’s rights have been breached). There is a significant body of case law in relation to shareholder actions and this can often be an uncertain area of law, it is therefore crucial to get good early advice on the strength of any potential shareholder claim. Note that the courts are generally unwilling to intervene in the operation of a business unless a genuine legal entitlement is established.
For more information on how to deal with company deadlock, please feel free to contact Mat Howat, Partner and head of FWJ’s Director and Shareholder Disputes team on 0207 841 0390.

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Stephen Downie

SENIOR ASSOCIATE at Francis Wilks and Jones

Stephen is a dual qualified lawyer and ACCA accountant, with over ten years experience in restructuring and insolvency law. He commenced his accountancy training with the Official Receiver and thereafter in several large private practice firms dealing with regulatory and asset recovery matters on behalf of liquidators, administrators, receivers and trustees in bankruptcy before qualifying as a solicitor. Prior to joining FWJ he was a lawyer at a large international law firm with offices in the City. Stephen is a Solicitor Advocate with experience of commercial litigation matters pertaining to dispute resolution, debt recovery and enforcement.