Reading time: 3 minutes

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.

Conclusion

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.

Webinars

Negative Online Reviews: What are the Legal Options?

Wednesday 22 September | 11:00 - 11:45am

Online
Negative or false online reviews of your business can be disheartening and damaging. Understand your legal rights and options with this free webinar.
Register Now

Australia’s Global Talent Visa: How to Attract Top Talent

Thursday 7 October | 11:00 - 11:45am

Online
Understand how to navigate Australia’s complex migration system to attract top overseas talent with our free webinar.
Register Now

5 Essential Contracts for your Online Business

Thursday 14 October | 11:00 - 11:45am

Online
Learn which key contracts will best protect your online business with our free webinar.
Register Now

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer