Recently a company called a shareholders’ meeting to vote on whether the company should expand into certain overseas markets. The shareholders were in disagreement as to the direction of the company, and this caused voting to be at a deadlock.

The shareholders reviewed the Shareholders’ Agreement to see how it was supposed to resolve a voting deadlock. As the Agreement was “off the shelf” it was not tailored to the company and it only provided for shareholders to enter into mediation and/or arbitration to resolve the deadlock. 

The shareholders spent many months attempting to resolve the dispute by way of mediation. This furthered disharmony among shareholders and incurred significant costs on both the company and the shareholders.

Do you know how your Shareholders’ Agreement resolves these types of disputes?

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contract between all the shareholders of a company, which usually covers a range of issues as to the operation of the company. In particular, all Shareholders’ Agreements should provide an effective process to resolve voting deadlocks, tailored to each company. As seen from the situation above, “off the shelf” Shareholders’ Agreements are usually not effective.

Business plans are recommended to be attached to Shareholders’ Agreements as a way to reduce the likelihood of disputes around the direction of a company. In the situation above, if the shareholders were aware of the company’s direction from the outset, it is less likely a deadlock would have occurred.

What deadlock resolution processes can be used?

There are a wide range of mechanisms that can adopted into a Shareholders’ Agreement to resolve voting deadlocks, which are all dependent on the type of company:

  • Casting vote – for some companies it may be appropriate to allow the Chairperson to have a casting vote, which allows the Chairperson to make a final decision on each matter. This can be an effective way to quickly resolve deadlocks but it may not always be appropriate for fundamental decisions of the company.
  • Independent third party – this clause would allow a third party who is independent from the company, and who also has knowledge of the company, to make a final decision to resolve the situation. Again, the decision is likely to be resolved quickly, however you have the risk of the third party making the final decision.
  • Share Buy Out – one or more shareholders have the option to buy out the remaining shareholders. It is important to include the process of selling the shares and the pre-determined formula to work out the price.
  • Russian Roulette – any shareholder(s) can serve notice on other shareholders to acquire their shares at a specified price. The other shareholders then have the opportunity to sell their shares at the price offered, or acquire the shares of the shareholders who served the notice at the price specified.
  • Agreed voluntary liquidation – the shareholders can agree ahead of time to wind up the company if deadlocks can’t be resolved within a certain timeframe.

This list is not exhaustive and there are many other mechanisms that can be used to resolve voting deadlocks.

In the above situation, if the Shareholders’ Agreement had included any of the above mechanisms, it is likely the deadlock would have been resolved in a more effective and timely manner.

Prior to entering into business, it is recommended to turn your mind to the potential for voting deadlocks to arise in the future amongst shareholders. We recommend seeking legal advice to help decide which mechanisms would be appropriate for your company to resolve voting deadlocks, and other key terms in Shareholders’ Agreements. 

Leading law firms committed to helping clients cost-effectively will have a range of fixed-priced Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Claire Tyler
Commercial Lawyer
Wellington, New Zealand