Deadlock in a company - either at board level or with equal shareholdings - can lead to all sorts of issues and be potentially disastrous for a company. Our expert team can help diffuse the issues and bring about a swift and commercial resolution.
Where an even number of parties set up a company then, either at shareholder level or at the board level (usually both), this leaves the risk that if the parties (or an equal number of parties) do not agree, then it may be very difficult to pass any resolution and ultimately the company may suffer as a result of this inability to make decisions.
At the start it appears to be a good idea – a typical situation is where two individuals set up a company with a view to a common interest or business objective. Neither wants the other to have more power or be capable of making decisions without the other’s consent, and equally they both want an equal share of the company’s profits.
However. there is often a problem of what is referred to as company deadlock, where decisions cannot be made because of an even 50/50 split in opposing views as to the proposed solution.
Why have a 50-50 arrangement?
To avoid a company deadlock occurring, the first question to be asked is why there is a need for an arrangement where both parties must be compliant for all major decisions made by the company.
A 50-50 arrangement cannot prevent a director authorising something on behalf of the company (as such powers exist under the Companies Act 2006 and it cannot prevent a director acting unreasonably or others (employees, the bank, the company’s accountant) listening to them rather than you.
Although your rights should be equal as part of a 50-50 arrangement, it does not prevent the security provided by a strong trusting working relationship.
Practical difficulties of deadlock
Quite often, there is the situation where one director is in power of the finances (including management information and accounting records) and the other is seeking access to such documentation and is prevented from doing so.
There is inability for that director to be forced to cooperate with such requests in the absence of engagement unless the requesting party seeks the court’s intervention (by which time irreparable damage is likely done to the company).
There is no possibility of removing that director from the board as the other director only has 50% of votes (you need more than 50% of board votes to remove a director
A director has fiduciary duties to act in a company’s interest and a majority of these were codified under the Companies Act 2006. However, whilst a director should act in accordance with those duties, there is no policing of such compliance.
- practically, as described above any director of a company can bind it to contractual commitments and any other agreement which does not conflict with their personal interest.
- as a result, particularly where one director is controlling the finances and is willing to risk the personal consequences, it is quite difficult to prevent them from disposing of assets or otherwise manipulating the company’s affairs for their benefit.
Benefits of a shareholders agreement
A shareholders agreement would be able to provide a solution to disputes and company deadlock by providing a remedy. This remedy may be a swing vote (often referred to as a “Golden Vote” to one party, or it could provide the procedure to be followed, whether that results in a formal mediation, arbitration, valuation and exit from the company.
A failure to follow such requirements makes the legal remedy easier – a court merely has to be asked to uphold the agreement and there are very little grounds to dispute the remedy sought (as the parties have already agreed this previously).
The very threat of such consequences is often enough to engage the wrongdoer.
At Francis Wilks & Jones we can assist you to avoid the above circumstances arising and advise you as to the correct form of a shareholders agreement. Please call any member of our team for your expert consultation today. Alternatively email us with your enquiry and we will call you back at a time convenient for you.