Meaning
Contractual remedies address situations where a board of directors or a group of shareholders cannot reach a decision due to an even split in voting power. The deadlock resolution clause provides a pathway to break the impasse and prevent the functional paralysis of the enterprise. It often appears in joint venture agreements where two parties hold equal fifty percent stakes.
Procedural Escalation
Mediation or referral to the respective chief executives of the parent companies usually constitutes the first step in the process. If a deadlock resolution clause fails to produce a consensus, more aggressive measures such as a shot gun provision or a mandatory auction may be triggered. These mechanisms ensure that one party exits the business to allow for continued operations.
Economic Consequence
Buyout prices are typically set by a formula to avoid lengthy litigation over the value of the departing member’s interest. Use of a deadlock resolution clause protects the assets of the company from being wasted during a period of management inactivity. The threat of losing their investment often encourages parties to negotiate a compromise before the clause is invoked.
Exit Right
Liquidation of the company serves as the final resort if no party is willing or able to purchase the shares of the other. Inclusion of a deadlock resolution clause in the original articles of association prevents a minority stakeholder from holding the entire board hostage. Clear definitions of what constitutes a deadlock help avoid the accidental activation of these exit rights.
