What is Deadlock?

Deadlock occurs when you have come to a point at either board or shareholder level when there is a fundamental disagreement between the parties. Typically, this occurs in companies owned 50:50, as no director owns a majority interest so on a deadlock no decision can be made on what could be a key or strategic issue such as the direction of the company.

The joint venture documentation usually provides that deadlock occurs if a resolution is put to the board on two or more occasions and it is not passed, or if it is not possible to put a resolution to the board because a board meeting cannot be held as the required number of directors is not present at the meeting or a reconvened board meeting.

Where Can I Find the Deadlock Terms?

If you think a deadlock has arisen, it is important to look at the joint venture agreement or shareholders agreement (JVA) to understand what constitutes a deadlock and how that deadlock can be resolved.

Deadlock provisions can be included in the articles of association (“articles”) but as these provisions are commercially sensitive, most shareholders will not want these provisions to be made public so deadlock provisions are usually included in the JVA.

Often the deadlock provisions in the JVA or the articles include a combination of some or all of the above mechanisms.

And if you need help in understanding the situation from a legal point of view or need some assistance  in resolving a dispute, please do contact us.

Common Ways to Resolve Deadlock

  • Giving a third party the casting vote in the event of deadlock. This method can be useful provided the third party has sufficient knowledge of the company and specifically of the matter giving rise to the dispute.
  • Appointing a third party whether connected or unconnected to the company to mediate the dispute. This can be useful if the third party is independent and has the trust and confidence of the parties. This method can be useful but like any form of mediation requires the parties to engage in good faith and is unlikely to be successful if the differences between the parties are intractable and irreconcilable.
  • The JVA or the articles may contain buy/sell options so that one shareholder can offer to either buy or sell the other party’s shares at a specified price. The person receiving the notice can decide to buy or sell his shares at the specified price. These type of provisions usually provide that if the shareholder who receives the notice does nothing, that shareholder is considered to have accepted the other party’s offer to buy or sell the shares.
    Although a bit of a rough tool, this kind of buy/sell mechanism can work as it forces the shareholder issuing the buy or sell notice to consider a realistic price because that shareholder may be required to either buy or sell at that price.
  • The JVA or articles simply provide for a termination of the joint venture in the event of deadlock.

Contact us if you would like advice on a 50:50 joint venture or deadlock mechanisms.

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