Deadlock happens when the people who control a company can't agree and nobody has the votes to break the tie. The classic case is two shareholders with 50% each who also sit on the board as the only two directors. One wants to sell, the other wants to keep going, and every resolution either of them proposes fails.
Company law doesn't give you much of a way out on its own. A deadlock clause in the shareholders' agreement (and sometimes the articles) sets out in advance what happens when you get stuck. If you're signing a shareholders' agreement with an equal or near-equal partner, it's one of the clauses most worth reading slowly.
What counts as deadlock
A good clause defines deadlock precisely. Usually it means that a particular kind of decision (a reserved matter, or a board resolution on a significant issue) has been put to a properly called meeting and not passed, and then not passed again at a second meeting called for the purpose, or that a meeting has been inquorate twice because one side stayed away. The definition matters because it decides when the rest of the machinery can be switched on.
Watch for two extremes. A clause that treats any disagreement as deadlock invites one party to manufacture a dispute so it can trigger a buyout. A clause with no clear trigger, or no timetable, may never bite at all.
Why the default position is unattractive
Without a deadlock clause, the options are poor. The model articles for private companies give the chair of a board meeting a casting vote, but many 50/50 companies disapply it precisely so that neither side has the upper hand, and there is no casting vote on a shareholder vote unless the articles say so. If nothing works, a shareholder is left with going to court: a petition under section 994 of the Companies Act 2006 on the ground that the company's affairs are being run in a way that is unfairly prejudicial to them, or a petition to wind the company up on the just and equitable ground under section 122(1)(g) of the Insolvency Act 1986. Both are expensive and uncertain, and a winding-up petition can damage a trading business before any order is made.
The main deadlock mechanisms
Escalation
The first step is usually to refer the issue upwards or outwards for a set period. In a joint venture between two companies, that might mean the managing directors of each parent meeting to try to resolve it within, say, 14 or 21 days. In an owner-managed company it may simply require a structured meeting between the shareholders. Escalation costs little and resolves more disputes than you'd expect, because it forces people to set out their positions properly.
Mediation
If escalation fails, many clauses require the parties to try mediation with an independent mediator, often appointed through a named body if they can't agree on one. Mediation is confidential and non-binding: the mediator helps the parties reach their own agreement but doesn't impose one. The clause should say who pays, how long the process lasts, and what happens next if it doesn't produce a deal.
Expert determination
An independent expert, usually an accountant or valuer, decides a specific question. It works well for questions that have an answer, such as what the shares are worth or whether a budget figure is reasonable. It works badly for questions of strategy, such as whether to sell or expand, because there is no expertise that answers those. An expert's decision is normally stated to be final and binding except for fraud or manifest error, so it is hard to challenge, which is the point but also the risk if the expert's remit is loosely drafted.
Russian roulette (shotgun) clause
One shareholder serves a notice offering to buy the other's shares at a stated price per share. The recipient then has to choose: sell its shares at that price, or buy the offeror's shares at the same price. Say you name £400,000 for your partner's 50%. Your partner can take the £400,000 or require you to sell your 50% to them for £400,000.
The logic is that the person naming the price doesn't know which side of the deal they'll end up on, so they have a reason to name a fair figure. That works when both shareholders have similar access to money. Where one has much deeper pockets, the wealthier party can name a low price knowing the other can't raise the funds to buy, and the recipient is forced to sell cheaply. The same problem arises where one shareholder runs the business day to day and the other would struggle to take it over. If you are the less liquid party, a shotgun clause can work against you.
Texas shoot-out
Each shareholder submits a sealed bid to an independent person (often the company's solicitors or accountants) stating the price at which it would buy the other's shares. The highest bidder buys at its bid price. Some versions add an open auction round. It avoids one side choosing the price and the other simply reacting, but it still favours whoever can raise more money, and both sides need proper valuation advice before bidding.
Put and call options
A put option lets a shareholder require the other to buy its shares. A call option lets a shareholder require the other to sell. In a deadlock clause, one or both parties may be given an option that becomes exercisable once deadlock has continued for a set period, usually at a fair value fixed by an independent expert under a valuation formula in the agreement. Options are more common where the parties are unequal: for example, an investor given a put so it can exit, or a majority owner given a call so it can take full control. The key terms are who holds the option, when it can be exercised, how the price is set, and how and when payment is made.
Winding up
As a last resort, some agreements provide that if deadlock continues after all the other steps, the shareholders will vote to put the company into members' voluntary liquidation (if it is solvent) and share out what is left. It is a blunt tool and destroys the value of the business as a going concern, which is partly why it is there: the threat encourages a negotiated result. A solvent liquidation requires the directors to make a statutory declaration of solvency, so it is not available if the company can't pay its debts.
Avoiding deadlock through the voting structure
Some deadlocks can be designed out rather than resolved. If one shareholder has more than half the votes, ordinary decisions can be taken by majority, with a list of reserved matters needing the minority's consent as well. An independent chair with a casting vote at board level is another option, though both sides need to trust that person, and the casting vote only helps with board decisions, not shareholder votes. These structures don't suit true 50/50 partnerships, where neither party will accept being outvoted.
Which mechanism suits which company
For two equal founders who both work in the business and have similar resources, a ladder of escalation, then mediation, then a Russian roulette or Texas shoot-out clause is common. For a founder and an investor, put and call options at an expert valuation are usually a better fit, because a shotgun clause invites the richer party to use its money as leverage. For three or more shareholders, shotgun clauses become awkward (who is buying from whom?) and majority voting with reserved matters, backed by escalation and mediation, tends to work better.
Most well-drafted agreements use more than one step. A sensible sequence is a short escalation period, then mediation within a fixed time, then either an option or a buy-sell mechanism, with winding up as the backstop.
Which decisions should the clause cover
The deadlock procedure should usually apply only to matters that genuinely need both sides' agreement: selling the company or its business, issuing new shares, taking on significant borrowing, approving the annual budget and business plan, changing the nature of the business, appointing or removing directors, paying dividends, and entering into transactions with a shareholder or its associates. Day-to-day management decisions should be left to the board or the managing director, or the company can't function.
Red flags when reviewing a deadlock clause
A trigger that is too easy to pull. If one party can declare deadlock over a minor point and then serve a shotgun notice, the clause becomes a way to force the other out.
No timetable. Each stage should have a fixed period, so the process can't be spun out while the business drifts.
No protection for the less wealthy party. Consider longer periods to raise funding after a shotgun notice, an option to pay in instalments with security, or a minimum price set by reference to an independent valuation.
A vague valuation basis. If the price is “fair value”, the agreement should say who the expert is (or how they are appointed), whether a minority discount applies, and what date the valuation is taken at.
Articles and agreement that don't match. Share transfer provisions usually sit in the articles. If the articles impose pre-emption rights or other restrictions that conflict with the deadlock buyout, the transfer can get stuck. The two documents need to work together.
Before you sign
Work through the clause as if the deadlock had happened today. Who would serve the notice, could you fund a purchase at a realistic price, and how long would it take? If the answers worry you, negotiate now, while relations are good. You can run your draft through a shareholders' agreement review to see how the deadlock provisions would operate for you. If you are already in a dispute, you can upload your shareholders' agreement to understand what it says, but a live dispute is also the point to take legal advice from a solicitor.
Related: what the shareholders’ agreement review covers, and a complete sample report.