A deadlock can arise in a joint ownership agreement when the owners of a company or parties to an agreement cannot reach an agreement on the terms and management which results in a  conflict. The situation typically arises in a 50:50 joint venture, where each shareholder owns 50% of a company and the parties are unable to reach a decision on the matter.
Some investors in the structural set-up would choose to be the dominant partner e.g. the one who makes the decisions, whilst others prefer to be the minority, e.g. preferring to take a lower risk. However, where parties are contributing equally in an agreement, it is common for the equal 50:50 voting rights to apply and this is where deadlock issues can arise
If the company’s articles of association do not provide guidance on the matter, the main outcome available to a shareholder would be to seek remedies from the courts. This can often become costly and time-consuming which may create difficulties for the parties involved. It may lead to the breakup of the JV company as well.
A better solution would be to implement deadlock resolution provisions in a company’s constitutional documents in advance to prevent this from happening.
To understand what type of deadlock situation has occurred, the drafting of the clause should be clear and unambiguous. If there are director or shareholder meetings not held in the applicable quorum or the directors vote or abstain from voting against a resolution, this can likely lead to deadlock.
Mechanisms to avoid deadlock, are to avoid certain trigger clauses in the agreement and having the foresight to implement resolutions in advance which are likely to lead to this. This will help speed up the amount of time spent making decisions and allowing a chairman to have a casting vote can also help towards a swift resolution.
Similarly, some matters can be reserved to an independent third party such as an expert or mediation/arbitration. The disadvantage of this, however, can be that they may not have the required knowledge of the JV business.
Other ways would be to limit the number of reserved matters, which means less number of consents are needed and another option could be to have provisions incorporated into an agreement allowing for one party to buy out the interests of the other.
Assuming the parties are interested in continuing the venture agreement, there are some divorce measures which can be used as a last resort in deciding whether to allow the venture to continue operating. A Russian roulette procedure notifies the other party that they wish to sell its share of the JV at a certain price and then that party has to either accept the offer or sell its own share in the JV to party making the offer at the same price. This achieves fairness in the party wishing to exit to put forward a fair price but can also lead to a financial imbalance where the stronger party could seek to manipulate this.
In conclusion, deadlock clauses are an important tool to document a clear process whereby when conflicts arise to state what to do and parties should refrain from jumping to the termination and buyout provisions if they can.
If you would like to have some advice relating to Joint Ventures please contact Attwells Commercial Team today at info@attwells.com or call us on 01473 229200.
