When running or operating a business there may be several occasions where company shareholders encounter a deadlock.
Deadlocks can be highly problematic and if not managed correctly, greatly hinder the functioning of a company. Deadlocks occur when shareholders in a company are unable to reach an agreement or come to a decision.
To effectively, navigate situations where company shareholders are deadlocked, it is integral that you understand the nature of deadlocks, the issues they present, typical scenarios and options for resolving deadlocks.
What is a Deadlock?
Deadlocks arise when shareholders with equal or significant voting power in a company are unable to reach a majority decision on a particular matter.
Deadlocks typically occur in situations where there are an even number of shareholders or when there are multiple major shareholders with conflicting interests.
Deadlocks may also occur when decisions require a majority or unanimous vote of shareholders.
Why is a Deadlock Problematic?
Deadlocks can paralyse decision-making processes within a company, and this can ultimately lead to stagnation and potentially negative consequences for the company.
Deadlocks can also hinder strategic planning, and delay critical actions needed for the company’s success. It is also common for deadlocks tolead to internal conflicts, erode shareholder trust, and damage the company’s reputation and market position.
Additionally, a prolonged deadlock can create financial and legal risks, as the company may be unable to respond promptly to changing market conditions or exploit potential opportunities.
Typical Scenarios that Cause Deadlock
Various scenarios can lead to a deadlock among company shareholders. A common cause is a disagreement about strategic direction.
When shareholders have divergent opinions on the company’s future direction, deadlocks can occur regarding decisions such as entering new markets, investing in research and development, or pursuing mergers and acquisitions.
A deadlock may also reflect a difference in risk appetite amongst shareholders. When shareholders have varying risk tolerance levels, it can lead to conflicts when making decisions involving investments, capital allocation, or expansion plans.
On occasion, a deadlock can also be prompted by interpersonal disputes or clashes of egos among shareholders. Personal conflicts can impede decision-making and create a deadlock within the business.
To address a deadlock effectively, it is essential to refer to the company’s constitution or shareholder agreement, as these should provide guidelines and mechanisms for dispute resolution.
For instance, these documents often grant a casting vote to a specific individual, such as the chairperson, to break the deadlock and make final decisions.
Alternatively, the constitution or shareholder agreement may stipulate that in the case of a deadlock, one party can buy out other shareholders at a fair value, effectively breaking the deadlock by transferring ownership.
Where the constitution or shareholder agreements do not provide for a casting vote or a buy-out option, they may instead require shareholders in deadlock to engage in Alternate Dispute Resolution (ADR).
These clauses outline the steps to be taken when a deadlock occurs and specify the appointment of a neutral third party to facilitate discussions and help reach a resolution. ADR clauses can include provisions for mediation, arbitration, or negotiation processes to resolve the deadlock outside of court.
ADR to Resolve Deadlock
Mediation, a commonly used ADR process, can be highly effective in resolving deadlocks between company shareholders.
Mediation involves engaging a neutral mediator who facilitates communication and negotiations between the parties involved in the conflict. The mediator helps identify common interests, explores potential solutions, and assists in reaching a mutually acceptable agreement.
Mediation offers several advantages in deadlock situations. It allows shareholders to maintain control over the decision-making process and actively participate in finding a solution.
It also promotes open communication, encourages creative problem-solving, and helps preserve relationships between the parties involved. Additionally, mediation is often a more cost-effective and time-efficient alternative to litigation, allowing for a quicker resolution of deadlocks.
Apart from mediation, other ADR processes such as arbitration or negotiation can also be considered depending on the nature of the deadlock and the preferences of the parties involved.
These processes provide additional options for resolving a deadlock outside of the courtroom, ensuring a more collaborative and tailored approach to finding solutions.
When ADR is unsuccessful at resolving a deadlock, litigation may be the only solution. An interested party can apply to the court to assert that the company’s affairs are being conducted in a way contrary to the Corporations Act 2001, either because it is oppressive or contrary to the interests of the members as a whole.
In such cases, the court can make orders which resolve the deadlock in order to facilitate the company returning to its normal operations. In extreme cases, this may involve the court ordering the board to be reconstructed or even wound up as a last resort.
Deadlocks can paralyse decision-making processes within a company, hinder strategic planning, and delay critical actions needed for the company’s ongoing operations and success.
Understanding how potential deadlocks occur and the options for resolving them can help company shareholders work towards efficient and effective solutions and assist in ensuring that company is running smoothly and effectively.
The information in this article is general in nature and does not constitute professional advice.