How do you avoid deadlocked decision-making?

In practice, it regularly happens that decision-making within a company gets stuck. People refer to such a case as deadlock. A deadlock can have serious consequences for business operations, as essential decisions cannot be taken. It is therefore important to make adequate arrangements to prevent deadlock situations. This article explains exactly what deadlock is, how it arises and how it can be prevented.

What is a deadlock?

In corporate law, deadlock refers to a situation where a stalemate or deadlock occurs within a company. This can be either within the board or at the general meeting, with none of the parties able to make a decision or reach agreement on an important decision. Deadlock can therefore impede the progress of important matters/activities, such as investments or the appointment of directors and executives.

Deadlock situations are more common in joint ventures, where two shareholders or groups of shareholders each own 50% of the shares. An example: the board of the joint venture has prepared the financial statements and submits them to the general meeting for adoption. One of the shareholders with 50% of the shares votes in favour of adopting the financial statements, the other 50% shareholders vote against it. Due to the tie vote, the resolution does not materialise, so the financial statements are not adopted.

How does a deadlock arise?

A deadlock occurs when there are two or more interested parties with an equal number of votes. Or when a larger majority is required and parties cannot agree on a decision.

It is important to note that deadlock does not necessarily have one specific cause. But rather it can be the result of a combination of several factors. Some common causes are:

• Different visions and objectives: if stakeholders within a company have different visions, objectives or interests, it can be difficult to reach agreement on important decisions.
• Personal conflicts: personal conflicts between stakeholders, such as board members, shareholders or executives.
• Limited resources: a shortage of resources, such as financial or human resources, can lead to conflicts over how best to obtain or allocate those resources.

Although there are opportunities to convince the other party/parties or by coming up with a different proposal, deadlock leads to a halt in decision-making on the issue.

How do you prevent deadlock and how can deadlock be resolved?

Resolving deadlock often requires intensive consultation, conflict mediation and possibly legal intervention to help the parties involved reach a solution. This may include mediation, arbitration, litigation, shareholder buyouts, or even dissolution of the company.

However, it is advisable to establish rules to get out of deadlock situations. Therefore, establish clear rules for decision-making within the company. And what procedures should be followed for resolving disputes in case of disagreement. It is advisable to clearly define these mechanisms in the articles of association or shareholders’ agreement.

A deadlock within the board can be resolved by stipulating that in case of a deadlock, the decision will be taken by the general meeting.

In case a deadlock (also) occurs within the general meeting, a provision can be included in the articles of association or shareholders’ agreement that a third party takes the decision on the resolution. Deadlock clauses often refer to arbitration or binding advice. Both options have their advantages and disadvantages. Here, the following elements are important: (1) speed of the decision and (2) shareholders’ compliance with the decision (execution).

In addition, a provision can be included in the shareholders’ agreement whereby a shareholder buys the shares of the other shareholder(s). There are several variants of this such as the “shoot-out” or “Russian roulette”. However, it is important to note that activating such a clause may have significant financial and legal implications for the parties involved. And therefore, this clause should be drafted carefully.

It can also be stipulated that if the votes are tied, fate will decide. Obviously, for the foreseeability of decision-making, this is not always desirable.

Conclusion

It is important to draw up clearly formulated rules for decision-making within your company. In doing so, a good deadlock rule is essential. This ensures that your company does not get stuck unnecessarily (for a long time) if the decision-making process comes to a standstill.

Contact

Do you need help drafting articles of association and shareholder agreements? Do you need tips for a good deadlock arrangement? Or do you have a dispute about decision-making? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.