Deadlock clauses in shareholders’ agreements

29 November 2022 | Knowledge, News

Shareholders often disagree with each other on how their company should be managed and controlled, and the direction and strategy it is taking. Differing views may be beneficial to a business, but disagreement, potential deadlock and an inability to make important decisions can be severely damaging to the company (and, in the long run, to shareholders).

Deadlock provisions within shareholders’ agreements, investment agreements or articles of association provide a means of resolving issues which shareholders cannot agree or otherwise compromise on.

What is deadlock

Usually, shareholders’ agreements set out the conditions that must be met for deadlock to occur. However, these are generally situations which go beyond a mere single ineffective vote by shareholders.

Usually, a number of votes on the same issue must be made over a period of time, with the outcome being each time consistently indecisive. Such delay would generally give shareholders time to compromise on or find other ways of resolving the issue.

Deadlocks can also occur when other dispute resolution methods have been tried and failed, for example, when shareholders’ agreements provide for shareholders using mediation to find an amicable solution if an issue cannot be resolved after two general meetings.

Deadlock provisions are a way of forcing a decision in such situations, being often so severe for one side that the threat of their use is enough for the issue to be resolved by compromise. The circumstances in which they can be used are usually limited to matters significantly affecting business operations.

The most common types of deadlock clauses

Although deadlock clauses can be given all sorts of interesting names, they all boil down to a requirement of one party selling their shares to the others so that there is a change of control and the remaining shareholders can make a decision on the disputed matter. In effect, these are all types of conditional termination provisions. Common examples of deadlock clauses in shareholders’ agreements include:

Shotgun / Russian Roulette

Essentially, such clauses allow one shareholder to make an offer to buy out the other shareholder for a certain price and under certain terms and conditions, who is then allowed to either accept such offer or buy the shares of the offeror for the same price and under the same terms and conditions (assuming there are two equal shareholders).

Texas Shootout

In this type of deadlock clause, each shareholder sends a sealed bid for the others’ shares to an independent and neutral third party. The third party then opens all bids at the same time and the highest bid wins, with the winning shareholder required to buy the others out at that price.

Auction

An auction is similar to a shotgun mechanism as the offering shareholder may have the opportunity to pay a price of their choice, including a premium. However, an auction also differs from a shotgun approach, in that it lacks adverse consequences for shareholders making low bids, as the outcome simply depends on who makes the highest bid.

Summary

The absence of appropriate clauses to resolve deadlocks before they occur can come with a high cost. With such clauses, if there is severe disagreement, there are various ways of seeking exit from the company or resolving the problem such as using drag along clauses. Given the genuine possibility of a deadlock among shareholders and the existential threat this can pose to a company’s ongoing viability, shareholders should ensure the shareholders’ agreement contains robust and precise provisions on procedures designed to resolve these matters.

Any questions? Contact the authors:

Dominik Karkoszka

Adam Czarnota


See also

Controversial amendment to the Commercial Companies Code

 

Latest Knowledge

Whistleblower bill back in the Sejm

On 23 May, the Sejm (the lower house of the Polish Parliament) passed a bill on the protection of whistleblowers. We summarise what has changed from the previous versions, what needs special attention and what amendments the Senate has made.

Belka tax cut and what this means for companies

The Minister of Finance has announced a plan to reduce the Belka tax, to come into effect on 1 January 2025. And although he has said that the groundwork is already being laid, he has not yet revealed all the details of the proposed changes.

Liability of management board members

The liability of management board members is a complex and multifaceted issue. It is therefore worth taking a closer look at these issues, especially in light of recent developments.

Effectively managing collective redundancies

The labour market is seeing an increased number of collective redundancies. We check what rules govern collective redundancies and what obligations must be fulfilled in order to carry them out effectively.

SME Fund – Tomasz Szambelan accredited IP Scan provider

Tomasz Szambelan has been included in the list of accredited IP Scan providers maintained by the Polish Patent Office. The IP Scan service is part of the grant scheme for the filing of trade marks, designs and inventions from the European SME Fund.

New rules for setting fines for businesses by the President of UOKiK

At the beginning of April 2024, the President of the Office of Competition and Consumer Protection (UOKiK) published new clarifications on the determination of the amount of fines in cases related to the conclusion of agreements restrictive of competition and the abuse of dominant position.

Contact us:

Dominik Karkoszka

Dominik Karkoszka

Attorney at Law, Senior Associate

+48 608 317 340

d.karkoszka@kochanski.pl

Adam Czarnota

Adam Czarnota

Advocate, Senior Associate

+48 787 389 207

a.czarnota@kochanski.pl