If the shareholders in a company cannot agree on a crucial decision and the voting is split 50:50, it can cause major difficulties for the business. If a way forward cannot be found, the company could potentially end up being liquidated. If this is not what you want, taking prompt action to find a solution is crucial.
A deadlock frequently occurs if two individuals have set up a company together, allocating each other half of the shares each. Ideally, one party should hold enough shares to give them a casting vote, or the Articles of Association should set out provisions for dealing with a split decision.
It is often the case that this has not been done, however. When a business is being set up, it is easy to assume you will always be able to reach a decision together. When you cannot, you may need professional help to find a way forward.
It is important to take action as soon as possible, as a business can be severely damaged by an ongoing dispute if decisions cannot be taken and the day-to-day operations are disrupted. There is also a risk that bank accounts could be frozen if a bank becomes aware of the difficulties.
How to Resolve a 50:50 Shareholder Dispute
There is little in the Companies Act to help two directors/shareholders who are locked in a 50:50 dispute. It is not possible to take steps to remove a director or force a transfer of shares, so an alternative solution will need to be sought.
The best way to resolve matters is generally by negotiation or mediation. An expert company lawyer will be able to suggest potential options for moving forward. If this is not possible, you will usually be advised to consider mediation.
A mediator with company expertise will work with all parties to help them explore potential solutions. While a compromise might not be ideal, the alternative could be liquidating the company.
Can a 50:50 Shareholder Liquidate Their Company?
If a deadlock has been reached and one director with a 50% shareholding wants to liquidate the company, the court will need to be involved. A shareholder or group of shareholders with 50% of the shares will not be able to force a liquidation, so the only available option is to ask for a court order.
The court will expect the parties involved to have made attempts to settle the matter without litigation, including by using mediation.
Issuing a Just and Equitable Winding-Up Petition
You can then consider issuing a just and equitable winding-up petition. This is the same type of petition used by a creditor who may be seeking payment and who believes the company needs to be liquidated for this to happen.
The court will generally look for alternatives to ending the business. For example, it may be possible for the party who wants the business to continue to buy out the other’s shares.
How to Avoid a 50:50 Shareholder Dispute
Taking preventative action to avoid a shareholder deadlock can prevent disagreements from damaging a company.
A shareholders’ agreement is one of the best ways of avoiding difficulties. It should be a bespoke document drafted to take into account the particular circumstances of your business and how the shareholders want to be able to deal with issues.
As well as setting out how disputes and voting will be dealt with, a well-drafted shareholders’ agreement can help to avoid disputes from arising by ensuring that all parties understand their rights and responsibilities.
A shareholders’ agreement will usually contain deadlock provisions, setting out how the situation will be dealt with. For example, it could include buy-back provisions so that a shareholder can sell their shares. The agreement should also contain dispute resolution clauses, giving a clear process for handling disagreements. This will generally include a requirement to attempt mediation.
When a shareholders’ agreement is drafted, it gives everyone the opportunity to discuss difficult issues before they arise and the agreement will then reflect the decisions that are made. Ideally, the agreement will be put in place when a company is set up, but it can also be drafted later on.
Resolving a 50:50 Shareholder Dispute
You are strongly advised to seek legal advice as soon as a shareholder dispute or deadlock arises. Early intervention by an expert in dealing with shareholders’ disputes can often resolve matters before the situation degenerates further and positions become entrenched.
A company lawyer will be able to advise you of your rights and the options open to you and represent you in securing an acceptable outcome.
In addition to mediation or winding up the company, the following options may sometimes be available in dealing with a 50:50 shareholder deadlock:
Derivative Claim
If a director has breached their statutory duties or their common law obligations, it may be possible for the company shareholders to bring action against them in the name of the company.
The court’s consent is required for this, and it will look at any other possible alternatives as well as the motive behind the action. The decision made will usually be what the court considers to be in the company’s best interests.
If the court agrees with the action, it has the power to remove a director who is in breach of their duties.
Buyout
One party could buy the other party’s shares. It may still be necessary to go through mediation in dealing with this option to settle which party will sell and how much the shares will be valued.
De-Merger
Depending on the business, it may be possible to separate it into two entities. This can resolve a shareholder deadlock where two directors are involved, as they agree to have one part of the business each. Where one aspect of the business is more valuable than the other, it may also be necessary for a payment to be made by one party.
For further information, see our director and shareholder disputes services.
Contact our Shareholder Dispute Solicitors
At Witans Solicitors, our company solicitors have wide experience in resolving 50:50 shareholder disputes and working with businesses to find a way through potentially damaging disagreements.
If you would like to speak to one of our expert shareholder dispute lawyers, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
