Resolving Deadlock: Texas Shoot Out, Russian Roulette and less melodramatic options
When setting up a business, the last thing that’s on your mind is what will happen if it all goes horribly wrong. People don’t choose to go into business with people they don’t trust or that they don’t get along with, so it’s often difficult to imagine a time where relations between the parties have broken down to such an extent, that no decisions can be made and the business is effectively paralysed. Unfortunately, this happens more frequently than you’d think, and whilst trying to resolve these disputes keeps lawyers busy, there are ways to address the risk at the outset and minimise the costs, stress and damage to the business in the event that a dispute does arise.
Where companies are 50:50 owned or where there are certain matters that require the unanimous approval of the joint venture parties, there is scope for what is called deadlock. This is where, despite their best efforts, the directors or shareholders of a company can’t agree on the best course of action for the company to take. Under English law, the default position is that a company makes decisions by a majority of the board of directors. Where there are just two directors, this means that every decision must be approved by both directors and where relations have broken down beyond repair, it can become impossible to approve even the simplest of matters. Any attempt by a director to act alone in these circumstances won’t be valid, may well be illegal and will in most cases, constitute a breach of the director’s statutory duties.
There are many options available for resolving disputes, some with more melodramatic names than others: A Russian Roulette process is where one party offers either to buy the shares of the other party OR to sell its own shares to the other party (but not both) at a specified price. The party in receipt of the offer can then either accept the offer OR reverse the offer at the same price. Because the other party has the right to reverse the initial offer, the first party MUST be prepared to either buy or sell its shares at the price it suggests, thereby ensuring that it is an honest offer. A Texas Shoot Out process is where both parties submit sealed bids to buy out the other party’s shares. There are other, less drastic, options available, such as agreeing to appoint an independent director to the board who will have the casting vote or agreeing to refer disputes to an appropriately qualified third party and agreeing to be bound by the decision.
Rebecca Gardner, Corporate & Commercial Partner at Howat Avraam Solicitors comments: The most effective way to deal with the issue of deadlock, is to discuss it openly at the outset and to agree what should happen in the event of such a dispute. Having a written shareholders’ agreement setting out a process for resolving disputes gives both parties a framework to follow in the event of a dispute and will in most cases avoid lengthy and costly court proceedings. Even if a full shareholders’ agreement seems excessive, where deadlock is a realistic prospect, having some kind of dispute resolution process in place before things go wrong is essential.
Howat Avraam Solicitors provide Corporate, Commercial, Employment, Real Estate and Contract Dispute advice to companies, business owners and individuals. As business owners ourselves, we have a pragmatic in-house approach to resolving issues before they arise, by working alongside our clients as part of their team. We are commercial, practical and entrepreneurial in our approach to legal services.
To discuss any Corporate or Commercial matter with us on a no obligation basis, please contact Rebecca Gardner on 020 3735 6700 or email Rebecca at Rebecca.Gardner@hasolicitors.co.uk . Alternatively, visit our website at www.howatavraamsolicitors.co.uk for more information.