Deadlock

In practice

Deadlock is the typical problem of a two-person company with equal shareholdings. In a dispute, the business comes to a standstill because no resolution can be passed. If the managing directors are involved, day-to-day business can be affected too. In practice, an escalation mechanism is agreed for this. First adjournment, then mediation and, as the final stage, shoot-out clauses. These settle who stays and how the price is determined.

In ‘Russian roulette’*, one side names a price. The other side must decide whether to buy or sell at that price. Alternatively, in a ‘Texas shoot-out’*, one side makes an offer to buy the shares. The other side can either sell at that price or make a higher offer to buy. This continues until one side buys. In a ‘Sicilian opening’*, both submit a sealed bid to a third party; the higher bid wins. If the parties differ in financial strength, the financially stronger side almost always wins. Where nothing has been agreed, the last resort is an action for dissolution, which is often not the desired outcome. This should therefore be dealt with at incorporation.

* Note: The names of these clauses are not used consistently.