What can I do to avoid a deadlock in my company?

Is it possible to avoid and/or solve a deadlock in my company? In practice is more common than we might think. or even to wait at the time of incorporation for a company to be set up, for a a situation of deadlock in the company which could paralyse the company's activity and, consequently, the continuity of the businessbecause it is not possible to take ordinary or more important decisions (e.g. approval of the annual accounts, approval of a relevant investment, etc.).

These deadlock situations can arise due to the paralysis of decision-making both at the general meeting (i.e. when the share capital is made up of two shareholders at 50%) and at the administrative body itself (i.e. due to disagreements between the two joint administrators or in the event of a tie in decision-making by the board of directors).

In these cases, the law contemplates the dissolution of the company as a solution. (article 363 d) Ley de Sociedades de Capital), which would be detrimental to the shareholders who would not be able to continue the company's business.  

Block situation of a company What can be done?

In this video we summarise it for you

Avoiding a deadlock in society -@MERAC Legal & Tax Lawyers

Formulas for resolving deadlocks

Therefore, with this article, we would like to propose different formulas that could solve these deadlock situations and ensure the continuity of the company.The company's management body shall be able to act even in the event of a conflict between the shareholders or members of the management body:

  • In the event that the management body is a board of directors, in order to avoid a blockage in the decision making of this body, it is to give the chairman a casting vote. In this case, the statutes would give the president the casting vote in the event of a tie, so that he could tip the balance to one side or the other (RDGRN of 11 July 1956).

  • Appointment of a mediator or arbitrator. This is a process whereby an impartial or neutral third party intervenes to assist in the resolution of disputes or conflicts, such as mediation and arbitration. In this case, it would be left to the third party to make the company's own decisions.

  • Spin-off of the company. Possibility of considering a total or partial (if there are different branches of activity) spin-off of the company.

Other formulas that can be included in a shareholders' pact

In addition, there are other formulas which, although they cannot be contemplated in the articles of association, could be regulated in the bylaws. partnership agreement and could determine the possible solution to such conflicts should they arise in the future.:

  • The so-called "andorran pact" o "Russian roulette": in this case one of the partners offers to sell his or her shares to the other at a given price.

The partner may accept the offer and acquire the other partner's shares or units; or if he rejects the offer, he is obliged to sell his shares or units to the other partner for the price proposed by the latter. In this case, the partner who initially makes the offer will be obliged to acquire the shares at the price initially offered.

  • "Texas shoot-out"In this case, the solution is the delivery by both parties to the other party or to a third party of a sealed envelope with a determined price for the purchase of the other party's shares. The the partner issuing the highest valuation shall acquire the shares of the other partner at the indicated valuation.

This formula is suitable in cases where both partners are interested in continuing the partnership.

  • Call/put optionsThis instrument grants the option to buy or sell in the event of a deadlock to one or more shareholders. In this case, it is recommended that the valuation of the shares be determined by an independent expert.

  • Drag along): this clause generally grants the majority shareholder the right to the fact that, in the event of the sale of its holdings or shares, drag in the sale to the minority shareholder on the same terms and conditions offered to you.

  • Tag along (accompaniment): this clause allows the minority partner to adhere to the sale that the majority partner intends to dispose of its shares or units on the same terms and conditions as those offered to it.

The importance of the partnership pact

In our experience, we believe that it is it is essential that in partnerships where there is more than one partner, a partners' agreement be entered into in which, in addition to establishing the main rules for the functioning and organisation of societyIn this context, possible solutions to this type of conflict should be established.

In any case, determining the suitability of one formula or another will depend on each specific case, the type of business, etc., and it is therefore important that a rigorous analysis be carried out to establish the most appropriate mechanism and avoid future situations that could jeopardise the continuity of the business.

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February 10, 2024
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