Deadlock clause in the shareholders' agreement: how to avoid a stalemate

A deadlock clause is the escape route from a stalemate between shareholders. If you cannot reach an agreement on an important decision and this is blocking the entire BV, a good shareholders' agreement specifies how to resolve the situation: via mediation, a casting vote, an independent decision-maker, or—if all else fails—by one shareholder buying out the other or being bought out.

Bram and Joris have had it. Two weeks of silence on the phone about whether or not they should invest in new machines. Three months without decisions at the general meeting. A mediator who—to be honest—helped mainly because he cost €200 an hour and no one wanted to sit that out in an empty meeting room. Since then, they know: a deadlock isn't a theory, it's a night without sleep. In this article: what a deadlock is, which mechanisms work, and which clause you should have.

The short answer: what is a deadlock?

A deadlock is a stalemate between shareholders that prevents necessary decisions from being made. Classic examples:

• A 50/50 shareholding structure in which both parties vote against each other.
• A list of “reserved matters” that requires unanimity, and one shareholder who blocks.
• A board that is divided over a key direction and cannot find a majority.

The law offers no solution for a deadlock. The general meeting is not obliged to deal with it; nor can the board decide on it. The result: the BV is at a standstill, sometimes for months or years. A good shareholders' agreement prevents this from happening — or, if it does happen, from lasting a long time.

The common deadlock mechanisms

Five mechanisms used in a shareholders' agreement, ranked from soft (consultation only) to hard (forced exit):

1. Cooling-off + escalation. First a formal request for consultation, then escalation to, for example, the holding companies of both shareholders.
2. Mediation. An independent mediator helps you resolve this. Often a mandatory first step.
3. Casting vote / deciding vote. An independent chairperson or board member receives a deciding vote. Works well provided there is sufficient confidence in neutrality.
4. Binding advice or arbitration. An independent third party (lawyer, registered valuer, or arbitrator) makes the decision for you.
5. Forced exit. One of the shareholders sells, or you dissolve the BV. The heavy-duty assets, for when the rest fail.

Most good deadlock clauses combine them in a phased approach: first soft (consultation, mediation), then harder (binding advice), and finally the exit.

The three exit mechanisms: Russian roulette, Texas shoot-out and Dutch auction

The interesting naming. Three mechanisms to get out of a deadlock by buying out a shareholder:

• Russian roulette. Shareholder A offers his shares to B for price X. B chooses: either he buys A out for X, or he sells his own shares to A for X. The bidder must therefore name a fair price, otherwise he is betting incorrectly.
• Texas shoot-out. Both shareholders make a blind bid (in a sealed envelope). The highest bidder buys the other out for their own bid. Risk: whoever bids higher also pays more.
• Dutch auction. Both shareholders state a minimum price at which they would sell their shares. The party with the highest floor price buys out the other for the average of both bids. Works in a variant where both parties want to buy rationally.

Which one fits? Russian roulette works well when both shareholders have a similar financial position. Texas shoot-out requires two parties that value rationally. Dutch auction is less hostile but works less well with large differences in capital position. In practice, Russian roulette is the most common.

Which mechanism suits which private limited company?

A few rules of thumb:

• 50/50 BV with operating partners: mediation + binding arbitration + Russian roulette as a last resort. This combination ensures that you do not immediately face a forced exit, but that it is certainly there.
• Private limited company with more than two shareholders: mediation + binding advice. Russian roulette works poorly with three parties.
• Private limited company with both operational and non-operational shareholders: casting vote with an independent chairperson, optionally with arbitration as a backup. Works particularly well when operations cannot be halted.
• Private limited company with external investors: usually a preference for mandatory mediation and arbitration; forced exit only in the event of a genuine deadlock.

The choice depends heavily on the actual circumstances and what the parties can bear. Playing Russian roulette in a private limited company where one party holds significantly more capital is not a fair game.

What does the law prescribe regarding deadlock?

Not much. The law provides for a few emergency measures — consider the dispute resolution mechanism in Book 2 of the Dutch, with procedures for withdrawal (Art. 2:343 BW) and expulsion (Art. 2:336 BW). However, these procedures are slow, costly, and end up in court (the Enterprise Chamber). Not a cheerful prospect for those who wish to continue running their business.

The statutory dispute resolution mechanism is a safety net, not a solution. A good deadlock clause in your shareholders' agreement prevents you from ending up there.

What belongs in a deadlock clause?

Specifically, four elements:

1. Definition of deadlock. When does a deadlock occur? Specifically: which decisions trigger the clause, and after how many failed voting attempts?
2. Phased process. Which step follows which? Include deadlines, otherwise things will stall.
3. Final mechanism. What happens if all steps have been completed and you still haven't reached an agreement? Russian roulette? Mandatory dissolution? Judicial dispute resolution?
4. Lead time. The entire procedure must not be endless. A maximum of three to six months is customary.

Honest recommendation

A deadlock clause is one of those subjects where writing incorrectly is more expensive than not writing at all. A mechanism that is legally shaky offers a false sense of security: in a genuine stalemate, you won't get away with it. For a decent deadlock clause—and for the broader shareholders' agreement surrounding it—a lawyer with corporate law experience is the smartest investment.

Explore the options for having your shareholders' agreement drafted or reviewed. For private limited companies (BV) with two equal partners, a good deadlock clause is especially important — see also shareholders' agreement for 50/50 partnerships.

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