Meaning
Contractual rights allow one shareholder to buy out another when a board or management reaches a terminal stalemate. The deadlock call option triggers after a defined period of failed mediation or unsuccessful voting. It provides a path to clear the impasse by removing one party from the capitalization table.
The price is usually determined by a formula or an independent valuation.
Triggering Event
Shareholders must specify in the agreement the conditions that constitute a failure to agree. Use of a deadlock call option follows a formal notice period where the parties attempt to resolve the conflict. If the vote remains split on a reserved matter, the option becomes exercisable.
This mechanism prevents the total paralysis of the enterprise.
Valuation Method
Determining the strike price is the most contested part of the drafting process. A deadlock call option might use a fair market value determined by an auditor or a pre-set multiple of earnings. Some agreements use a shotgun clause where the party initiating the call sets the price and the other party chooses whether to buy or sell.
This ensures a realistic offer.
Capital Requirements
Financial capacity must be demonstrated by the exercising party to complete the purchase. A deadlock call option fails if the buyer cannot secure the funds within the closing window. In such cases, the right might flip to the other shareholder or lead to a mandatory liquidation.
