50:50 companies – how to prevent deadlock paralysis

 

November 2023

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This Guide is part of my series of Guides to shareholders arrangements. All my previous Guides can be found here.

Shareholder arrangements can come in all shapes and sizes. Deadlock companies are unusual. This is an In-depth Guide about them. So in-depth that it comes in four separate Chapters. This is Chapter Two.

Chapter One was an introductory Chapter and explained why deadlock paralysis can be such a pain and the basic ways in which you can prevent it.

This Chapter Two explains how having a well-thought-out and well-drafted shareholders agreement can help prevent the potential paralysis caused by a fallout between the owners of a deadlock company.

Chapter Three explains various different ways in which a shareholders agreement might provide to break through any paralysis which could otherwise be caused by a fallout between the owners of a deadlock company.

Chapter Four finishes with some guidance as to other possible ways to help you resolve things, including how you can use the courts to help.

Although this Guide is about deadlock companies there is plenty in it which is relevant to other shareholding arrangements.

So let’s crack on. How can a shareholders agreement help prevent the potential paralysis caused by a fallout between the owners of a deadlock company?

1. There is no ‘one size fits all solution’.

Different factors can influence the possible solutions. An experienced corporate lawyer can help advise on what kinds of provisions might be most suitable for any particular 50:50 company. Factors might include:

• Can the company move forward at all if one or other owner is no longer involved?
• What role will each owner play in the company?
• Does the company rely on contacts or IPR or skills sets or cash brought in by either owner?
• Is one owner much richer than the other?
• How old is each owner? Might one want to slow down or stop working or sell out earlier than the other?

If you’re not careful, you could inadvertently create conditions which might actually encourage one owner to create a deadlock just so they can take advantage of the provisions you have agreed which are aimed at resolving a deadlock! (For example, a Russian roulette provision might favour the richer owner). So you have to give careful thought to the possible solutions based on the possible factors, taking good professional advice.

2. Basic provisions

Any well thought out shareholders agreement should address certain basic questions and issues.

It should set out key principles, mechanisms and protections designed to protect and balance the interests of the owners as far as possible having considered all the relevant known factors.

With a 50:50 deadlock company you would like to think that provisions should be pretty much reciprocal, but different factors can mean this is not always the case.

Some provisions may be needed to cover possible issues which company law and standard Articles of Association do not address, or loopholes which they actually create. An obvious example is to set out the right of each owner (which they would not have under company law) to appoint an equal number of directors.

It can often be sensible to have tailored Articles of Association as well as a shareholders agreement, as these are better suited to setting out the particular rights held by each owner and the procedures which need to be followed for shareholder and board meetings. Indeed, it is often sensible for each owner to have a separate class of share. This can make the drafting somewhat easier and clearer.

The shareholders agreement could cover a whole range of other issues which are not covered by this Guide. See for example this Guide to the top questions any shareholders agreement needs to address.

3. Provisions to help prevent a deadlock arising

If the owners have fallen out over anything and it looks like a deadlock could arise which might paralyse the company, a shareholders agreement may contain some provisions which aim to head the deadlock off at the pass before it gets too serious. Some of these might perhaps be of some use if the deadlock is only over a particular management decision. If the owners have really fallen out, then they may well be of little use at all, as any particular issue they are deadlocked over may just be an excuse for being difficult, or a symptom of a bigger problem.

The first three examples are where someone or other is given the authority to force a decision on a deadlocked issue:

1. Agreeing in advance that one or other owner will have the final say. This could be over particular issues (such as ones which they perhaps have more expertise in); or simply alternating each owner’s final say on a periodical basis each yearly (perhaps by providing for the chairmanship of the board to alternate each year with the chairman having final say over board deadlock decisions). Such provisions are quite unusual.

2. Bringing in a third party as an independent expert who has authority to make the final decisions on certain matters (particularly management decisions) which the owners can’t agree on.

3. Appointing a trusted third party as an independent director on the board, so that at all times they have the casting vote over management decisions which the owners might otherwise fall out over

The next two examples are where a mechanism is inserted to try to give the owners a time period where they have a chance of resolving their differences, before the ‘apocalypse’ solutions mentioned in Chapter Three of this Guide are allowed to be invoked. The idea is that the longer that lines of communication can be kept open, and possibly someone can bang heads together, the more chance there is of avoiding a complete fallout and deadlock paralysis:

4. Bringing in a third party to help, even though the third party has no power to make any decisions.. This could be an independent advisor, ideally one whom both owners already know and trust.

5. Requiring the parties to mediate before the ‘apocalypse ‘solutions mentioned in Chapter Three of this Guide are allowed to be invoked. I often recommend mediation where there has been a shareholder fallout – I have seen remarkable results achieved with the help of a skilled professional mediator.

It may well be that none of these provisions would end up preventing the deadlock fallout and the likelihood of subsequent company paralysis. So a shareholders agreement needs to include provisions which provide for an alternative outcome. The next chapter (Chapter Three) of this Guide sets out some of the rather extreme provisions which can be invoked.

What next? Contact me for a complimentary Shareholder Arrangements’ consultation:

If you are thinking of entering into any shareholder arrangements with business partners or investors or are having any issues or difficulties with existing arrangements please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary ‘Shareholder arrangements’ consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls to which you might otherwise be exposed, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

If you are a director or shareholder of a company and want more information on how to deal with shareholders and director relationships so you can protect the value of your business and your role in it, together with your business and exit objectives, then please contact me.

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