Shareholders agreement: deadlocks and ways to overcome them

A deadlock in business occurs when partners cannot come to an agreement on crucial management and strategic development issues of the company. This can arise due to an equal distribution of votes, refusal to compromise, conflicts of interest, or a lack of dispute resolution mechanisms, leading to paralysis of business activities and potential financial losses.

Let’s discuss ways to resolve deadlock situations:

• Independent Expert/Arbitrator/Mediator. Partners can agree to involve an independent expert to evaluate and resolve contentious issues. This could be an experienced business consultant or industry specialist, whose decisions will be binding for both parties. It is important to determine in advance how such an expert will be selected and what the working procedures will be.

Arbitration and mediation are alternative dispute resolution methods that allow partners to avoid lengthy and costly litigation. Arbitration involves hiring an independent arbitrator who makes a binding decision based on the evidence and arguments presented by the parties. Mediation, on the other hand, involves working with a professional mediator who helps partners find mutually acceptable solutions through negotiations and discussions, thereby preserving business relationships and reducing conflict levels.

• Voting Mechanisms include approaches such as rotating the decisive vote, where the right to make the final decision on a contentious issue is passed in turn to each partner, ensuring balance and fairness. Other voting schemes may include doubling the votes of one partner for a specific period or regarding specific issues.
• “Russian Roulette” and “Texas Shootout” Mechanisms.

The partnership agreement can include mechanisms for buying out a partner’s share if their continued participation becomes impossible or undesirable for the company. 

“Russian Roulette”: one partner proposes a price for the other’s share, and the other must either accept the offer or buy out the first partner at the same price. 
“Texas Shootout”: both partners submit sealed bids to purchase the other’s share, with the one offering the higher price buying out the other partner.

• Actual Division of Business. In case of irreconcilable differences, partners may consider the possibility of an actual division of the business. This means that the company’s assets and liabilities will be divided among the partners, allowing each to continue operations independently. This process can be complex and time-consuming, but it allows for the preservation of the business, albeit in a modified form.

Developing clear and effective mechanisms for resolving deadlock situations in the partnership agreement helps minimize risks and ensure business stability even in the face of serious disagreements.

Authors: Irina Kuheika

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