A shareholders agreement should set out how your company will be run, the responsibilities of each shareholder and director, and how a shareholder can sell its shares or otherwise exit the company. A well-drafted shareholders agreement will also include a clear procedure on how to resolve disputes, and what options there are if there is a deadlock i.e. there are equal votes for and against. These documents are typically drafted by experienced contract lawyers.
Disputes, compared to deadlocks, are relatively easy to resolve, as the majority shareholder(s) can usually resolve them. When a dispute arises between the directors and the directors are unable to resolve it, the dispute is usually brought to the shareholders. At the general meeting, the shareholders will usually decide, by a vote, unless a poll is demanded, on the resolution of the dispute. Each shareholder will have 1 vote. If a poll is demanded, each shareholder has 1 vote for every share that it holds. This means that the resolution is likely to be in favour of the majority shareholder.
Dealing with a deadlock is more complicated. This usually occurs where there are only 2 or maybe 4 co-founders, and each co-founder is a director and holds an equal number of shares.
So how do you deal with a deadlock?
There are several options available when dealing with deadlocks. The most common ways are set out below:
- Mediation – If a dispute cannot be resolved within a certain period of time, a director or shareholder may refer the matter to a mediator. If the parties involved cannot agree on who the mediator should be, the law society of the relevant state can appoint one. Each party needs to attend the mediation with a view to resolving the matter in good faith.
- Bidding – When there are 2 shareholders, each shareholder can decide on a bidding price i.e. the price at which it would purchase the shares of the other shareholder. The shareholder with the higher bidding price is then required to purchase all of the other shareholder’s shares.
- Winding up – This is usually used as a last resort. However, where there are ongoing disputes, and the directors/shareholders are unable to work together in the interests of the company, it may be a good idea to have the company wound up.
When there is a dispute or a deadlock, the last thing you need is another dispute about how to resolve the dispute or deadlock. Having a professionally drafted shareholders agreement, which clearly sets out the procedure in the event of a dispute, can save the company and its shareholders plenty of time, stress, and money. If you require any assistance with drafting a shareholders agreement, or if you have any questions regarding the dispute resolution clause in your shareholders agreement, you should seek advice from a contract lawyer.