Key points
- A company held 50/50 by two shareholders is structurally exposed to deadlock, as neither can prevail in a collective decision.
- A mediation clause requires a structured phase of dialogue before any court action; an arbitration clause refers the dispute to an arbitrator rather than to the court.
- The buy-or-sell clause (Russian roulette) allows one shareholder to propose a buy-out price; the other then chooses either to accept the sale or to buy at the same price.
- The forced exit clause and the casting vote govern the separation, but they require precisely defined trigger conditions.
- In an SAS (simplified joint-stock company), separate classes of shares can prevent deadlocks without upsetting the economic balance between shareholders.
- Court-ordered dissolution or a court-appointed interim administrator remain last resorts: slow, costly and unpredictable.
A company whose share capital is held in equal parts by two shareholders is structurally exposed to deadlock. Since neither can prevail over the other in a collective decision, disagreement can paralyse management and put the business at risk. This situation is particularly common in companies founded by two people who trust each other at the outset but whose positions diverge as the business grows.
See also: making your shareholders’ agreement legally sound.
Preventing this risk requires the articles of association or the shareholders’ agreement to provide in advance for mechanisms that break the impasse without going through court-ordered dissolution.
Deadlock clauses in a shareholders’ agreement
The mediation or arbitration clause
If there is a persistent disagreement over an important decision, the shareholders’ agreement can require recourse to a mediator before any court action, or refer the dispute to an arbitrator rather than to the court. Mediation introduces a structured phase of dialogue that often unblocks the situation or leads to agreement on the terms of a separation.
The chair’s casting vote clause
In some set-ups, the shareholders’ agreement gives one of the shareholders a casting vote when votes are tied on certain defined decisions. This casting vote is valid only under the conditions precisely defined by the agreement and cannot give one shareholder a general advantage over the other.
See also: corporate lawyer.
The buy-or-sell clause (Russian roulette)
The buy-or-sell clause (sometimes called the Russian roulette clause) allows one shareholder to offer to buy the other’s shares at a price they set. The other shareholder may then either accept the sale or reverse the offer and buy the offeror’s shares at the same price. This mechanism creates an incentive to offer a fair price, since the offeror may end up as the buyer.
This clause is effective in breaking a deadlock, but it assumes that both shareholders have comparable financial capacity to buy out the other. Without this parity, the mechanism can favour the financially stronger shareholder.
The forced exit clause
The shareholders’ agreement can provide that, in the event of a persistent disagreement over defined strategic decisions, one shareholder may require the other to buy their shares, or impose a joint sale of the business to a third party. These mechanisms must be described precisely to avoid disputes over the conditions that trigger them.
Solutions in the articles of association
The articles of association can also contain provisions to prevent deadlocks. In an SAS, it is possible to create separate classes of shares, giving one of them specific rights in certain defined decisions, without upsetting the economic balance between shareholders. These arrangements must be carefully designed so as not to create other imbalances.
Going to court as a last resort
Where there are no contractual mechanisms and a serious disagreement between shareholders paralyses the functioning of the company, a shareholder may apply for early dissolution on just grounds (Article 1844-7, 5° of the French Civil Code (Code civil) (in French)) or for the appointment of an interim administrator (administrateur provisoire). These court routes are slow, costly and unpredictable. They show the value of having planned contractually how to break the impasse.
For assistance with drafting your shareholders’ agreement or handling a deadlock, see our dedicated start-up lawyer page.
