The difficulty of a company deadlock

When two people decide to set up in business together and establish a limited company to operate it, their first priority may not be to think about what will happen if, at some point in the future, there is a disagreement between them. However, over time, they may develop differing views about the identity or future of their business.

In a typical deadlock scenario, the same two people will be both directors of the company, each with one vote, and 50:50 shareholders, with an equal voice in determining matters which are reserved to shareholders to decide. Generally, the decisions they take either as directors or shareholders will require at least a majority vote, so if they cannot agree, there is a deadlock between them.

It is helpful if the shareholders have agreed in advance what should happen in the event of a deadlock so that they both understand where their discord might lead. It is possible to provide for what is to happen either in the company’s articles of association and/or a shareholders’ agreement, depending on what is most suitable in the circumstances.

In light of any such provisions, they may, after further discussion, agree a compromise and continue in business together. Or, if the disagreement between them is more profound and cannot be resolved, they may agree to sell or wind up the company on terms they both find acceptable. Alternatively, they might agree that one of them (or the company) will buy the other’s shares, or that the shares may be sold to another person.

In the most difficult deadlock situations, however, the shareholders cannot agree how to end their business relationship and the company’s articles, or a shareholders’ agreement, do not provide for how the situation can ultimately be resolved.

In these cases, it may be that the only way forward is for one of the parties to apply to the court for an order winding up the company. However, the costs involved in such an application, and the potentially damaging effect such an order might have on the value of the company (if granted), make this route untenable for many, who may prefer to return to the negotiating table and attempt further discussion.

Liz Gifford is a solicitor specialising in charities law in the business services department at Barker Gotelee Solicitors in Ipswich.

This article first appeared in the East Anglian Daily Times 10th April 2019.

Business Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email [email protected]