Company Deadlock…What is it, and how do you prevent it?

Commercial disputes are an unfortunate reality of corporate life, made all the more challenging when faced with the undesirable situation of Company Deadlock.

Walker Rose Solicitors are being instructed by an increased number of clients seeking legal advice when disputes arise between directors (those who manage the business) and/or shareholders (those who own the business). For SMEs these are normally one in the same. 

Disputes are a reality when in business, but most of us would prefer not to disagree with ‘one of our own’.   

Deadlock arises when the shareholders in the dispute have equal standing in a company (i.e. 50/50). It is caused when the parties are unable to make any decision on behalf of the company as neither party can achieve the required majority to pass a company resolution.

How do you get out of Deadlock?

  • Negotiations: The parties explore alternatives; this will require the parties being pragmatic to ensure the company doesn’t fall apart. In some circumstance it can ultimately mean a shareholder/director leaving the company thus leading to valuations of the shares and settlement agreements being negotiated.
  • Mediation: Mediation is a procedure in which the parties discuss their disputes with the assistance of a third party in the attempt to reach a resolution.  The cost of mediation is less than the cost in time and money for the litigation of a dispute. However, mediation will only work if both parties agree to listen and explore alternatives.
  • Litigation: This should be as a last resort, if the parties cannot reach any decision on how to settle the dispute the court can intervene.

How to prevent Deadlock?

Prevention is always better (and cheaper) than cure.  By having a well drafted Shareholder Agreement the shareholders can agree, when relations are healthy, on how they would settle a dispute should deadlock arise.

A shareholder agreement private contract between the owners of a company and often sets out how the shareholders foresee the financial, strategic and management running of the company. 

The Agreement should have a deadlock clause setting out the procedure to follow in the event of Deadlock.   

 

…..Other benefits of Shareholder Agreement:

  1. Investor Protection – shareholder investors can insist on provisions to protect their investment such as performance targets.
  2. Protects company confidentiality - shareholders have access to valuable confidential information about the company, a shareholder agreement can include provisions protecting company confidential information during the life of the agreement and on termination.
  3. Non-Compete Restrictions – preventing parties from completing against the business
  4. Reduces costs associated with disputes - can be a very useful tool in avoiding and managing disputes by including provisions setting out a mechanism for the parties to resolve such disputes.

 

Walker Rose Solicitors Expertise

Walker Rose Solicitors provides astute legal advice and the drafting of legal agreements, polices and documents to address your immediate and on-going business needs.

We can assist whether you are a new start-up or an established business.  We work for you to design ‘best practice’ doctrines ensuring and securing a smooth running and efficient workplace.

Walker Rose Solicitors provide sensible commercial legal advice and draft the agreements you need in place to reduce areas of dispute or at least provide a mechanism for the parties to resolve a dispute.

We can help you grow and evolve safe in the knowledge that you, your business and your brand are protected and stand on a strong legal ground to move forward.

Our advice is always precise, resilient and affordable.

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Our mission is to provide businesses, and their owners, with quality legal assistance in the most cost-effective way