This article describes the legal concept of deadlock, which often appears in shareholders’ agreements.
Shareholders’ agreements sometimes contain a deadlock provision or a deadlock resolution clause. Deadlock is used to prevent and resolve conflicts within a company that has two equal owners. With an ownership distribution of 50/50, there is a risk of operations being halted due to disagreements between the owners.
Our contract template defines a deadlock as follows: “If the Parties are not able to reach consensus concerning matters that require a certain majority consensus, accordance or in other terms are able to reasonably categorize the situation as a “deadlock” situation, the Parties must proceed in the following way.”
In order to avoid the disagreement resulting in a dispute, internal negotiations will initially be carried out. Following that, a mediating attorney or impartial third party will be summoned.
Deadlock resolution clause
One of the most common ways of formulating a deadlock resolution clause is to grant both owners the right to provide an offer for the other owner’s price. The counterpart is free to accept or reject this offer and can also propose an offer of their own. Thereby, both owners have the pre-emptive right in relation to the purchase of shares.
The price calculation can be carried out in advance and will usually be the highest price for each nominal share. In the case of disagreements, an accountant will usually become involved. If an agreement is reached, the sale can be completed with a transfer agreement.
Other topics in shareholders’ agreements
A shareholders’ agreement is used to regulate internal agreements between the owners of a company. It is important that the shareholders’ agreement is specific and precise in its formulation, so that potential denunciations, breaches and disputes can be justly resolved.
The agreement will also contain rules for copyright, confidentiality and, importantly, a potential share transfer. The advantage of writing a long shareholders’ agreement is that it can be kept confidential, unlike public regulations.