A Company in Deadlock

It is common for those embarking on a new business venture to do so using a limited company. Very often two business partners will each hold 50% of the shares, and be the only directors (a so called “quasi-partnership”).

At the outset, it is easy to overlook the possibility of disagreements between the partners, but failure to consider dispute resolution at an early stage can put the company, and its shareholders, into dire straits later.

Without proper arrangements in place, in the event of a dispute between the two business partners the company can become “deadlocked”.  No decisions can be made in respect of the company’s business, either at board or shareholder level, because neither partner has a majority of the votes.  Resolving a deadlock when both parties are at loggerheads can be very costly for all concerned, as they seek either an exit for one of them or to wind the company up.  In this situation, it is often the case that neither party feels like a winner at the end of the process.

Some simple steps can be taken (at the outset or further down the line, but the earlier the better) to alleviate the risk of issues arising at a later date. The most common approach is to use a shareholders’ agreement to clarify the parties’ rights and responsibilities (hopefully thereby lessening the likelihood of a deadlock arising in the first place), and then detail deadlock resolution provisions, should problems arise.  In the absence of agreement between the parties, these usually enable one party to buy out the other, at a price calculated in accordance with a specified mechanism.

By negotiating and preparing for a dispute before one arises, you will protect the company from reaching a point where it can no longer continue its business despite all of your hard work in setting it up. It can also save you time and money in the future should a dispute arise.