What Do I Do If My Company Is In Deadlock Due To A Shareholder Dispute?

Founders of businesses are uniformly advised to have a shareholders’ agreement drawn up as one of the very first tasks when they form a new business. 

The reality is that when solicitors will generally quote circa £5,000 for drawing up the necessary agreements, this can often be put on the back burner, never to be considered again until there is a problem down the line.

Where two founders are contributing strongly at the outset, it is frequently the case that the shareholding will be split on a 50/50 basis.  Each shareholder therefore has equal voting power.  If there is no shareholders’ agreement then there will be no “deadlock breaking” provisions to govern a situation where the founders fall into disagreement. 

There can be many reasons why founders end up falling out.  Resentment can build up over time if one party feels that they are contributing significantly more value, while the other party is still earning the same from the business. 

Blame can be attributed to one party for a particular problem, issue, or liability. 

Sometimes the two people just drift apart on a personal level. Circumstances change. 

TRE has seen time and time again that when shareholders fall out, the business suffers.  A strong business can quickly become problematic if the directors/ shareholders stop communicating or worse if one of them begins to sabotage the company. 

What can be done in these circumstances?

The first step is to obtain advice and a view from a professional advisor. A review of the company documentation and present financial position will be key to informing decision making. 

Following this, if there is a true deadlock, then attempts should be made to agree a way forward.  This will likely be the most cost effective route to salvaging the position.  TRE can assist in mediating such matters for directors. 

When this does not work, more formal options may include a creditor’s application to court to appoint administrators if one of the purposes of administration can be achieved, or an application to court to wind up the company on a just and equitable basis. The effect of each of these routes is different, but in both cases an independent party (either an insolvency practitioner or the Official Receiver) will be appointed to oversee the business from the point of the court order being made. 

Both of these routes are significant and are not to be entered into lightly. However with the right advice and guidance, these options can be used to break the unfortunate deadlock and move forward, possibly rescuing the business as a going concern as part of the process. 

As TRE: Turnaround Experts, our focus is always on rescuing the business where possible, and at the same time providing strong director protection, and we are highly experienced at assisting directors who may need support.