The third in the series of articles considers how to avoid deadlocks or disputes.
Let’s consider a situation where, again, it’s 50/50 all the way but the business has reached a point where you want to take the business one way and your partner wants to take it another way, nothing can get decided, what can you do?
Even in a situation where there are more than two shareholders a deadlock can occur when there’s an agreed list of matters relating to the conduct of the business that can’t be undertaken by the company without the unanimous consent of the shareholders or the consent of a prescribed majority, which might not be achievable.
In those situations where either a deadlock has occurred or where there is a dispute there are a number of options that can be taken to resolve the matters in dispute, including:
Arbitration
Arbitration can be formal, invoking the Arbitration Act 1996 where a tribunal has power, for example, to:
- Instruct a party to, or instruct board members appointed by him to, do things in the spirit of and as foreseen in the shareholders’ agreement;
- Instruct a party to sell or transfer their shares; or
- Terminate the shareholders’ agreement and, possibly, wind up of the company.
It is more likely in the scenario that we have that any arbitration will be of an informal nature under the auspices of the accountants or other professionals who will be asked to sit the parties down and discuss ways to resolve the matters in dispute.
If parties are prepared to listen and compromise this can be an effective and inexpensive way of resolving deadlocks or disputes but, in the event that arbitration fails to produce a resolution, then more dramatic actions may need to be taken!
And, this is where it gets exciting (!), you need nerves of steel and your best poker face!
Russian Roulette (!)
Here one shareholder (“A”) offers to sell his shares to the other (“B”) at a specified price.
B can either accept the offer to buy A’s shares or reverse it at the same price so he sells to A.
The aim is to induce the party wanting to trigger the process to offer a fair price. However it always runs the risk of being reversed (hence the term Russian Roulette!).
Russian Russian Roulette (!)Roulette is rarely used in practice as it involves the termination of the relationship but may provide a fall back position to encourage a settlement by negotiation.
It is also really only a viable solution where there are equal shareholdings and may be inappropriate where the parties are not in a similar financial position because the party wanting to trigger the process could pitch the offer at a level he knows the other can’t match.
Russian Roulette is also inappropriate where one party is a minority shareholder who is not likely to be able to buy out the majority (who could easily manipulate the procedure to buyout the minority, potentially at less than market value).
An alternative is:
The Texas Shoot Out (“Yee-haw”)
Here A offers to buy out B at a specified price.
B either:
- Accepts A’s offer and sells; or
- Rejects A’s offer and states that he wishes to buy A’s shares at price higher than the specified price.
A and B then make sealed bids with the highest bid winning!
In the same way as in a Russian Roulette clause a Texas Shoot Out clause can operate in quite an arbitrary way and may not therefore be a satisfactory solution to a deadlock as the outcome will be the end of the relationship!
Again, the clause is only really viable where the parties have equal (or broadly equal) shareholdings and are also of broadly equal financial standing. Where this is not the case, the Texas Shoot Out could be open to abuse, in particular if one shareholder is aware, when triggering the shoot out procedure, that the other shareholder does not have sufficient funding to buy him out. Again this could lead to the shareholder triggering the shoot-out process to make an offer at a price below the fair price for the shares.
Should all resolution attempts have failed the final option is the Nuclear Deterrent which is that if all else fails to resolve a dispute the company is wound up and its assets distributed amongst its creditors, shareholders or other contributors.
This option means that it’s mutually assured destruction, the end of world as we know it, everybody’s work goes up in smoke and there has been much wasted effort over time in building up the company.
Due to nature of this option and the effect that nobody wins pressing the big red button it should be avoided at all costs but it does have the advantage of concentrating the minds of the parties as it’s better to agree a deal than see everything go up in a mushroom cloud!
For more information on Shareholder Agreements please contact me, Stephen.jarman@taylors.co.uk or 0161 200 5691