Deadlock clause: breaking a tie in a 50 50 company

Sample clause

a shareholders agreement for Tidewater Brewing Pty Ltd, a fictional Geelong craft brewery owned equally by the holding companies of its two founders

16. Deadlock 16.1 A Deadlock exists if a Reserved Matter is put to two Board meetings held at least 10 Business Days apart and is not approved at either. 16.2 Either Shareholder may then give a Deadlock Notice, and the managing directors of both Shareholders must meet within 10 Business Days to try to resolve it. 16.3 If the Deadlock is not resolved within 20 Business Days after the Deadlock Notice, it must be referred to mediation by a mediator agreed by the Shareholders or, failing agreement, appointed at the request of either Shareholder by the president of the law society in Victoria. 16.4 If the Deadlock remains unresolved 30 Business Days after mediation begins, either Shareholder (the Offeror) may serve a Buy Sell Notice stating a cash price per Share. 16.5 Within 30 Business Days the other Shareholder must either buy all the Offeror's Shares, or sell all its own Shares to the Offeror, at that price. 16.6 Until the Deadlock is resolved, the Company continues to operate in the ordinary course under the current Business Plan.

Sample wording, not legal advice.

Variants

What to negotiate

• What counts as a deadlock

  A trigger that is too easy lets one owner manufacture a crisis to start a buyout. Owners usually limit it to reserved matters or essential decisions, such as the budget, borrowing or a sale, failing at two meetings over a set period. Ordinary operational disagreements are left to management or a casting vote rather than the buyout mechanism.

• Shotgun fairness

  A shotgun clause keeps prices honest because the offeror may end up on either side, but it favours the owner with ready cash, who can name a price the other cannot fund. The less liquid owner asks for a longer acceptance period to raise finance, payment by instalments, or a sealed bid alternative instead.

• Cooling off before the buyout

  Owners who want the business to survive insist on escalation and mediation first, with fixed timeframes so the steps cannot be used simply to delay. A short cooling off period after a deadlock notice often resolves the issue on its own, because both owners can see the buyout clause coming.

• Running the business meanwhile

  A deadlock over one issue should not freeze everything else. Clauses require the company to continue under the last approved budget and business plan, protect existing contracts and employees, and stop either owner acting outside the ordinary course of business until the process has run its full course.

The risk of leaving it out

Without a deadlock clause, owners of a 50 50 company who cannot agree have few options apart from litigation. An Australian court can wind a company up on the just and equitable ground where deadlock has made it unworkable, but that route is expensive and slow, and it usually destroys the value both owners were trying to protect.

Resolution methods compared

A casting vote is quick but ends the equality of ownership. Escalation to senior people is cheap and keeps the relationship, but may only delay. Mediation is confidential and often works, but binds nobody. Expert determination suits valuation or technical disputes and is binding. An independent director breaks ties continuously, at a cost and only if both trust the appointee. A shotgun buy sell is fast and fair on price, but favours the owner with more cash, as does a Texas shoot out using sealed bids. Put and call options give a defined exit. Winding up is the last resort, because it usually destroys value.

What happens without a clause

The Corporations Act allows a court to order a company wound up where that is just and equitable, and deadlock between equal owners of a company run like a partnership is a recognised example. The court can instead make other orders in some cases, such as requiring one member to buy another's shares. In the UK, members can seek relief from unfair prejudice under the Companies Act 2006. ASIC's guidance on disputes in small proprietary companies limits its role to recommending legal advice, so the contract is the owners' main tool.

Where it sits in a generated document

A generated shareholders or joint venture agreement carries the deadlock clause as a numbered sequence of steps, each with its day count, and the reserved matters it depends on appear in their own numbered clause. The timeframes and the buy sell mechanics are written in as content. The document does not cite the Corporations Act, and each owner signing is a separate signature block party.

Documents that carry this clause

Shareholders agreement templateA veterinary diagnostics company has just taken $1.5 million from one seed fund. The founders keep 80 percent between them, so the whole agreement turns on a single number: the 75 percent consent threshold that puts the investor on one side of every decision that matters.Joint venture agreement template with contributions and splitAn unincorporated joint venture has no company to fall back on, so everything a company structure would supply has to be written down. This one puts two builders together for a single $14.6 million refurbishment, splits it 55/45, and sets out who funds it, who decides, how a deadlock breaks and how either of them gets out.Founders agreement templateTwo people in Fremantle are building a tide and swell planning app and have not registered a company yet. There are no shares to issue, so this agreement fixes the split, records why it is 55/45 while the memory is fresh, and turns itself into shares on the day the company exists.

Questions people ask