Deadlock: how to resolve a 50/50 director dispute

Deadlock between directors of a limited company occurs when the board can’t reach a majority decision. This typically happens in companies with two equal shareholders who are also directors, where they’re unable to agree on the operation of the company and no casting vote exists to break the tie.

Without a third party to tip the balance, this can paralyse a company, especially if one director deliberately seeks to frustrate the other. This can be incredibly damaging to the company’s management and future development.

Taking a pragmatic approach in deadlock situations is essential. Ideally, deadlock should be avoided altogether, but if it arises, there are several steps you can take to try to resolve it amicably.

What immediate steps can be taken in the event of a deadlock?

Start by reviewing the company’s articles of association to see if there’s any provision which addresses deadlock and how to break it. If the company has adopted the model articles of association for limited companies, it’s unlikely there will be a bespoke provision for deadlock.

However, if the directors anticipated the possibility of a deadlock when drafting the company’s articles, there may be measures in place to assist.

Examples may include:

• Requiring particular matters to be decided by a majority decision rather than unanimous decision
• Allocating more votes to one director
• Giving the chairperson a casting vote in the event of a deadlock.

You should also check whether a shareholders’ agreement exists. This may provide a mechanism for breaking deadlock and will be particularly relevant where the shareholders have different classes of shares with varying rights, such as increased voting power for one party.

What options are available to break director deadlock?

If the company’s articles or shareholders’ agreements don’t offer a solution, consider the following options:

1. Call a board meeting to seek resolution. This is the simplest and least confrontational option. A meeting allows directors to discuss the issues and explore a way forward. It avoids the need for legal threats of breach of duty or other forms of redress between directors to break the deadlock.
2. Call a shareholder meeting to explore resolution. This is similar to the first option. Shareholders may be able to force decisions where there’s a deadlock at board level. However, these first two options may not be particularly effective if both directors are equal shareholders and no majority can be formed.
3. Appoint a non-executive director to resolve deadlock. Bringing in an independent third party or contact to assist with making decisions about the future conduct of the company can help resolve disputes and guide future decisions. However, this requires majority consent, which may be difficult to achieve in a deadlock. Alternatively, the company could issue shares to a third party to resolve the dispute at a shareholder level – but again, this would require majority agreement.
4. Appoint a third party expert to determine the dispute. This is a cost-effective way to resolve technical or financial disputes without going to court. However, the parties must jointly agree to this approach and agree the scope of the expert’s role. Because the positions of directors in deadlock are often entrenched, this might not be a viable option.
5. Sell the company or a director’s shares. If one of the director-shareholders exits the company, the deadlock ends. Though drastic, this can be quicker and cheaper than litigation. Sale options include:
   • · The company buying back the shareholder’s shares
   • · One director selling their shares to another
   • · Selling to a third party.
6. Seek legal advice. This is particularly important if one director may not be acting in the best interests of the company and breaching their fiduciary duties. Legal advice can clarify obligations and help resolve the situation before it escalates.

What if court action is necessary?

If informal options are not successful, you may need to consider litigation or an alternative court process. For example:

1. Issuing an unfair prejudice petition. One of the shareholders would need to show the court that the company’s affairs are being conducted in a way that unfairly harms their interest. If the court agrees there is unfair prejudice, it will decide on an appropriate remedy, which could be an order for one director-shareholder to buy out the other or a sale of the company.
2. Issuing a compulsory winding-up petition of the company. An alternative option would be to ask the court to wind up the company on just and equitable grounds, even if it’s solvent. The court would consider whether there has been a breach of the company’s articles, broken expectations or obligation between shareholders or if there has been gross misconduct. A director could also elect to pursue both options at the same time.

Top tips to avoid or minimise director deadlock

• Consider adopting bespoke articles of association which clearly address what should happen in the event of deadlock and set out a clear mechanism for resolving disputes. This could also be included in a shareholder agreement where each director is also a shareholder. Ensure there’s a referral mechanism to a third party to help with deadlock
• Assess what decision the deadlock relates to and choose a proportionate and cost-effective method of resolving it. Don’t jump to extreme measures if a simple meeting or third party involvement may be a more effective and sustainable way to break the deadlock
• Being proactive is crucial to ensure deadlocks are resolved as quickly as possible so the directors can focus on the management of the company instead
• Seek legal advice early. Early intervention can clarify duties and prevent escalation.