Director & shareholder deadlocks — how to prevent & resolve disputes

When those responsible for owning and managing a company can’t agree, the company can effectively become paralysed. 

It’s important to identify where the deadlock has arisen as board and shareholder deadlocks affect different decision-making bodies and may require different solutions. The distinction remains important even where the same individuals are both directors and shareholders.

Here, Matthew Cleary explains the distinction and the practical options available.

What is a director or shareholder deadlock?

A deadlock may arise at director level, shareholder level or both. 

Directors tend to manage the day-to-day operation of a company. They’re not always shareholders, though in smaller companies they often are. Shareholders tend to be responsible for the wider strategic decisions.

A deadlock occurs at either level when the necessary voting majority required to approve a decision cannot be obtained.

Why the distinction matters in a 50/50 company

In a 50/50 owner-managed company, the same two individuals are likely to each be a director and shareholder. Moving a disputed issue from the board to a general meeting won’t ordinarily resolve it where the shareholders have equal voting rights and remain divided. The disagreement is simply reproduced at shareholder level.

A shareholder meeting may be relevant only where the shareholders have power to resolve the issue and the necessary majority can be achieved, for example because the voting rights at shareholder level aren’t equal. It’s not, by itself, a solution to a genuine 50/50 deadlock at board level.

Preventing deadlock

The articles and shareholders’ agreement should distinguish between board and shareholder decisions and set out what happens if agreement can’t be reached. 

Possible measures include:

• Board arrangements: an odd number of directors, agreed independent director, suitable quorum rules or, where appropriate, a chair’s casting vote. A casting vote may be unsuitable in a true 50/50 venture because it gives one side effective control.
• Expert determination: referral of a narrow technical issue, such as valuation or accounting, to an independent expert. This is generally less suitable for broad commercial disagreements.
• Exit arrangements: a buy-out, sale or, as a last resort, agreed winding-up mechanism, with clear provisions for valuation, funding and timing.

What to do when a deadlock arises

The parties should review the articles, shareholders’ agreement and relevant resolutions to identify the blocked decision and the approval required. Depending on the documents, options may include negotiation or mediation, use of an agreed escalation process, appointment or removal of a director where the voting position permits, interim arrangements to preserve essential operations or a negotiated exit. 

Court proceedings may be available where the statutory requirements are met. A shareholder may petition the court under section 994 of the Companies Act 2006 where the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to their interests. However, deadlock alone doesn’t establish unfair prejudice. 

In appropriate cases, a shareholder of a deadlocked company may also seek winding up of the company on the just and equitable ground, but this is a discretionary and final remedy. Specialist advice should be obtained before either route is pursued.

Key takeaways

Board and shareholder deadlocks are related but distinct. A shareholder meeting won’t ordinarily break a genuine 50/50 deadlock between the same individuals. The best protection is careful drafting that allocates decisions clearly and includes workable escalation and exit provisions. Once deadlock arises, early advice can help to preserve essential operations and identify a viable route to resolution.

Talk to us

As specialists in shareholder and director rights, we can advise on the governing documents, parties’ rights and practical options for resolving a deadlock.

Talk to us by calling 0151 600 3493, emailing hello@shareholderrights.co.uk or completing our contact form.