Precision Before Decision: Deadlock In Corporate Business

New businesses and joint ventures are often established with shared ambitions for growth and success.

In practice, however, shifting objectives, disagreements, and operational friction frequently give rise to conflict. One of the most common risks is corporate deadlock, which typically arises in 50:50 shareholding or equal voting structures, or where there are no pre-agreed mechanisms to resolve disputes on matters of significance. Such deadlock can paralyse decision making, disrupt commercial operations, and have serious consequences for the company.

In the absence of appropriate safeguards, court intervention may become unavoidable, whether through winding-up proceedings or alternative remedies. Accordingly, best practice requires anticipating deadlock scenarios and incorporating effective resolution and exit mechanisms into the company's constitutional and contractual framework from the outset.

Deadlock remedies in a Shareholders Agreement and Articles of Association (“ΑοΑ”) are essential mechanisms to address situations where cannot be agreed on key decisions, stalling potentially the operations of a company. Both, Shareholders Agreement and AoA, must contain specific, well drafted and clearly articulated provisions to address deadlock situations. The AoA set out the rules for the management of the company and the conduct of its affairs. A shareholders' agreement is a private contract between the shareholders and governs the relationship between them. Certain provisions must be incorporated into both the AoA and the shareholders' agreement for reasons of enforceability, as incorporation into the shareholders' agreement provides direct contractual rights and remedies. Both, are integral to the governance of a company and to aligning the contractual rights of shareholders.

• Texas Shootout: Texas shootout mechanism involves a procedure whereby, in the event of a deadlock, specific measures are triggered to resolve the stagnation of business operations. In practical terms, once a deadlock is reached, one partner or shareholder offers either to buy out the other party's shares or to sell its own shares. The procedure must be explicitly set out in the AoA and the shareholders' agreement and is usually implemented by way of a sealed-bid process, under which the party submitting the highest bid is required to buy the other party's shares at the price offered. Such provisions may also include clauses requiring the parties to use their best endeavours to resolve the deadlock within a specified timeframe.
• Russian Roulette: A Russian roulette clause is a deadlock-breaking mechanism commonly used in shareholders' agreements and AoA. When a deadlock arises, one party may trigger the clause by offering to buy the other party's shares at a stated price per share. The recipient must then choose either to sell its shares at that price or to purchase the triggering party's shares on the same terms.
• Compulsory buyouts/sell-outs: Clauses relating to compulsory buyouts or sell-outs provide a contractual right for one party to require the other party either to purchase its shares or to sell its shares, as applicable. Such transfers are effected at a predetermined price or at market value, as specified in the relevant clause, and are typically triggered by defined events or circumstances set out in the agreement.
• Arbitration clause: An arbitration clause is a provision which requires parties to resolve future disputes arising from a potential deadlock, through a binding arbitration process instead of tradition litigation, thereby saving time and ensuring privacy of proceedings. An independent third-party expert in the relevant field will be appointed as arbitrator to resolve the dispute.
• Chairperson casting vote: This particular clause ensures that an alternate chairperson is appointed and granted a casting vote in the event of a deadlock. In such circumstances, the alternate chairperson acts as the ultimate decision-maker and is empowered to cast the decisive vote either in favour of or against the proposed resolution, thereby enabling the company to overcome the deadlock and continue its operations.

In the event that none of the above options are viable and no alternative solution can be reached through negotiations, it may, as a last resort, be necessary to bring the matter before the Court. Section 211(f) of the Companies Law, Cap. 113, may be invoked, which provides that a company may be wound up if the Court is of the opinion that it is “just and equitable” for the company to be dissolved. Similarly, in this context, it should be noted that a mere breakdown in the relationship between shareholders is not normally sufficient to justify a court order for winding up. Strong evidence will be required to support such an application, demonstrating that it is contrary to good faith and to the essence of the agreement between the parties for the existing state of affairs to be allowed to continue. This principle provides legal protection to shareholders by allowing the Court to intervene where the company's affairs have become effectively unmanageable, resulting in a complete deadlock that obstructs the proper functioning of the company.

Whether such a petition would be successful depends on the Court's examination of the factual circumstances of each case on a case-by-case basis. It should be noted that, generally, the Courts are reluctant to interfere in the management and affairs of a company. As such, a petition brought under section 211(f) must be substantiated by strong evidence establishing the factual basis of the cause of action, including the existence of the additional equitable element required to justify the Court's intervention.

Alternatively, even in cases where the shareholding is held on a 50:50 basis, a claim for oppression of the minority may be brought before the Court under the principle of “oppression of the minority.” Provided that it can be established and substantiated by evidence that a shareholder's rights have been violated, section 202 of the Companies Law may be invoked, and remedies may be sought by way of a petition under that section. In light of the above, a shareholder may bring a claim based on the oppression of the minority principle arising from a deadlock and seek, inter alia, an order for the buyout of the other shareholder's shares in the Company or a court order regulating the future conduct of the Company's affairs.

Understanding the true nature of corporate risks and how businesses operate is crucial to anticipating and addressing unexpected issues. At Patrikios Legal, we recognise the complexities that arise from deadlock situations and the need for strategic legal intervention and we advise shareholders and companies on navigating these challenges and on measures to protect their interests and ensure smooth operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.