A Shareholders Agreement also sometimes called a Security Holders Agreement (SHA) is a written agreement between the shareholders of a company and sets out in a transparent manner the obligations, rights and responsibilities shareholders and directors have to a company and to each other to ensure its efficient and effective management.
Notwithstanding the best intentions of parties to a SHA there are times when the directors or shareholders will not agree.
Often the votes of a director are proportional to the shareholding of that director which can cause a deadlock.
What type of deadlocks are common in SHA?
A well drafted SHA may deal with these deadlocks in a number of ways such as:
- Auction
- Arbitration
- Casting vote
- Mediation
- Russian Roulette
- Sale
- Sealed bid
- Voluntary Winding up or liquidation
All of these methods have the ability to resolve the dispute but each of them have their own issues and often require good will and cooperation.
Therefore, when drafting the SHA, it is important that any clauses that are included to deal with deadlocks reflect what and how the parties think would be the appropriate mechanism to deal with them.
Outlined below are some of the most common mechanisms to deal with deadlocks.
Auction
This enables the parties to bid against each other to buy out the others, with the highest price winning.
Arbitration
An independent arbitrator will be appointed and their decision will be binding.
The arbitrator will be a qualified professional and will be cognisant of the fact they must ensure they act in the best interests of all the parties and the company.
Casting vote – Chairman
This enables one of the directors to become the Chairman of the board, as long as there is no conflict, and have a casting vote to break the deadlock.
Mediation
A Mediation clause can also be described as a best endeavours clause that forces the parties to the dispute to attend a mediation session with a third-party mediator.
The Mediator will be a professional whose job is to reach a satisfactory resolution between the parties without taking sides or passing any judgment.
Russian Roulette
These are most common where there is a 50:50 deadlock situation in a joint venture.
This clause allows a shareholder to buy the shares at an agreed upon price, but also entitles the other shareholder to buy the bidder out at the same price.
If they do not agree to the sell at this price, you then go to counteroffers, until a price is agreed to buy the other shareholder.
Sale
This is a simple agreement where the shareholders agree to sell the company and/or the shares at an agreed price or an agreed valuation.
An independent party can be appointed to carry out the sale and often one shareholder or director is appointed to undertake the procedure on behalf of the others.
Sealed Bid
This is an interesting method by which the shareholders make a sealed bid to buy the shares of the others in addition to any contracts with Director(s).
The parties generally have one opportunity to advance a bid to a third party such as an arbitrator who will then decide which offer is to be accepted considering the submissions and the value of the bids.
Voluntary Winding up or Liquidation
Voluntary winding up is the process of selling all the assets of the company, paying creditors, distributing any remaining assets to the shareholders, and then dissolving the company.
A voluntary winding up generally requires a special resolution which is 75% of the voting shareholders. After a company has been wound up it will cease to exist.
Liquidation occurs when a company is insolvent and the company’s assets are turned into cash, and those funds are used to repay the company’s debts if possible.
Liquidation can occur by a resolution of the shareholders or by an order of the court.
An independent liquidator will be appointed to carry out the liquidation of the company.
Liquidation results in the company being shut down and the company will cease to exist.
How can FC Lawyers help with deadlocks in shareholder agreements?
FC Lawyers have a very experienced and expert team of corporate lawyers who have significant experience in drafting Shareholders and Security Holders Agreements.
Contact our team to discuss any issues you’re having with a shareholder agreement or business law in general.
The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.
Prefer to get in touch?
With offices in Brisbane, Sunshine Coast, North Queensland and Sydney, our team is well equipped to provide both advice and support across a broad range of legal areas.
