OnHand Counsel

Corporate and Commercial Solicitors

Shareholder fall-out – how a shareholders agreement can help to break through the resulting paralysis


January 2024

Rating system:
Reading time (1-10 minutes): 3
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

This Guide is part of my series of Guides to shareholders arrangements. All my previous Guides can be found here.

Although this Guide is about deadlock companies there is plenty in it which is relevant to other shareholding arrangements.

My previous two Guides explained what deadlock companies are, why they can be such a pain (see this Guide), and some provisions (see this Guide) which you could think about putting in a shareholders agreement to help prevent deadlock paralysis arising if the shareholders in a deadlock company can’t agree on things.

But if you can’t prevent the shareholders from falling out, what can you do to break through the inevitable resulting paralysis and at least provide for some resolution? I set out below some of the possible solutions which you could set out in a shareholders agreement. These are often rather apocalyptic, and neither owner should probably want to invoke them. But they offer a last way out to avoid the disaster of deadlock paralysis. They can be invoked after a specified period of time has been spent trying and failing to resolve the deadlock in other ways, such as those mentioned in my previous Guide.

1. Selling the company. A shareholders agreement could require both owners to spend at least a period of time trying to find a third party buyer for the whole company. If they fail, then one or other of the provisions mentioned below could be triggered. It could even be open to one party to be entitled to force a sale by both owners to a third party if the other owner doesn’t want to go along with it (or buy the first owner’s shares out for a similar value). This kind of provision has many inherent difficulties.

2. One owner selling their shares to the other.

The nature and feasibility of any solutions where one owner buys out the other will depend on the particular circumstances, eg whether the company can operate without one or other owner or whatever they bring to the table. It will also depend on either owner’s financial position and the affordability of any buyout. It is quite difficult to anticipate and provide for these kinds of things at the very beginning.

a. Put and call options.

Should one or other owner be entitled to buy the other out ( a ‘call option’)? Or to require the other to buy them out (a ‘put option’)? If so, who and on what terms? And what else will need to be sorted out? The buyout terms could cover issues such as:

  • How shares should be valued.
  • Can payments be paid over time by instalments? If so, what if any comfort or security can be offered to the seller to cover the risk of non-payment? Could the buyout be done by way of staged buybacks by the company itself? And if the seller’s shares are only sold a portion at a time, what legal protections can he continue to be given as a continuing minority shareholder?
  • Restrictive covenants.
  • Making sure the seller is released from any ongoing personal guarantees they have given to third parties (such as bank lenders) as security for the company’s obligations.

b. Shotgun-type provisions, such as:

  • ‘Russian roulette’: where either owner (A) can give notice to the other (B) giving B the option to sell B’s shares to A at a price per share which A has nominated, or to buy A’s shares at the same price. This helps a sensible price to be aired! Sometimes these kinds of provisions can end up favouring the owner who has more money to play with, who might take the risk of putting a low price on the shares. A provision could be included that any such option should be at least within a range of a fair value which must be approved by an independent accountant; or that the buyer can pay in instalments. This then creates other issues to think about…
  • Texas or Mexican shoot-out or auction: where one owner (A) notifies the other (B) that A is willing to buy B out at an named price. B can either accept the offer, or offer to buy A out at a higher price. This might then lead to a sealed bid system (both owners put in bids to buy the other, and the highest bid when the envelope is opened wins), or things could be run like an auction with the highest final bid winning.

3. Orderly wind up. The ultimate solution is to provide that if none of the above produces a result to resolve the deadlock then any owner can insist on the company being wound up. If you have nothing else in your 50:50 company’s shareholders agreement then you should at least think about including this, as you really need some mechanism which can be applied to prevent the paralysis caused by a fallout between owners of a deadlock company. This rather damoclean solution can often help focus the owners’ minds, and encourage them to keep working to find a better solution. The provision might also need to address a few other issues, such as what an orderly winding up might involve. For example, should the owners have the right to bid for any underlying IPR which they could usefully take from the company?


It can be very difficult to anticipate and cater for what might happen in the future to a deadlock company and its owners. But without any provision at all you are potentially left with a disastrous paralysis. In practice, many owners who fall out over deadlock companies end up reaching settlement solutions which are very different from those which might have been provided for in their shareholders agreement. But the existence of those provisions often help to pave the way for the discussions which lead to these settlement solutions. A good corporate lawyer can help with the process of identifying, negotiating and documenting appropriate possible solutions for all sorts of scenarios.

The next and final chapter of this Guide gives some guidance as to other possible ways to help you resolve the problems caused by fallout and deadlock, including how you can use the courts to help.

What next? Contact me for a complimentary Shareholder Arrangements’ consultation:

If you are thinking of entering into any shareholder arrangements with business partners or investors or are having any issues or difficulties with existing arrangements please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary ‘Shareholder arrangements’ consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls to which you might otherwise be exposed, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

If you are a director or shareholder of a company and want more information on how to deal with shareholders and director relationships so you can protect the value of your business and your role in it, together with your business and exit objectives, then please contact me.

Would you like to receive further Guides and other published articles containing legal updates and tips? If so, click below…
Sign up for more Guides and legal updates