Deadlock Provisions in Shareholders’ Agreement: Understanding the Circumstances and Options

Introduction

Disagreements between shareholders often arise in a company. However, circumstances can change and the disagreements can lead to a potential deadlock, where the shareholders are unable to reach a decision on certain significant matters of the company.

It is therefore important to understand deadlock provisions considering the shareholding structure of the company. We set out some common provisions of a shareholders’ agreement which can be employed in a deadlock situation.

What is a deadlock?

A deadlock situation can arise in both 50:50 joint venture and companies where shareholders have disproportionate shareholdings. Shareholders’ agreements usually provide for several significant matters that require special resolutions (75%) as a form of minority protection.

If the shareholders are unable to decide on such significant matters, a deadlock situation would be deemed to occur. An example of deadlock situations is when shareholders fail to reach an agreement and vote on the matters which require special resolutions (75%) after two rounds of meeting over a certain period of time.

What are the common deadlock provisions?

(a) Casting Vote

The chairman of the board is given with a pre-determined casting vote in a deadlock.

(b) Appointment of an Independent Party

The shareholders mutually agree to appoint an independent third party which could be an arbitrator to facilitate decision-making process and decide on the matter.

(c) Russian Roulette

Any shareholder is entitled to issue an offer to the other shareholder, offering to either buy out the other shareholder or requiring the other shareholder to buy it out, at a specified price. This mechanism entitles the receiving shareholder to either accept the offer made by the other shareholder or sell its own share to the other shareholder, at the specified price.

(d) Put and Call Option

The put option holder is entitled to require the other shareholder to buy its shares at a pre-determined value or market value determined by an independent party.

The call option holder is entitled to compel the other shareholder to sell its shares at a pre-determined value or market value determined by an independent party.

(e) Winding-Up

Any shareholder is entitled to require the voluntary winding-up of the Company. In this context, all the shareholders mutually agree to distribute the assets and wind-up the company.

Conclusion

It is important to incorporate deadlock provisions clearly in a shareholders’ agreement to manage any deadlock situations. Shareholders should consider the incorporation of deadlock provisions at the beginning of a joint venture which are appropriate for them based on the shareholding structure and dynamic.

About the author

Sia Kar Soon
Senior Associate
Corporate/M&A, Regulatory Compliance
Halim Hong & Quek
kssia@hhq.com.my

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