Deadlock between two equal founders

Fifty per cent each works until the first real disagreement, and then company law offers no tie-break at all. The mechanisms that work, and the two statutory routes left when none was put in place.

Problems, in order · Part of Outsourced General Counsel

Two founders, fifty per cent each, no chairman and no casting vote. It works until the first decision they disagree about, and then nothing moves at all: not a bank mandate, not a hire, not a set of accounts.

What happens when two 50/50 shareholders cannot agree?

Deadlock is not a dispute in the ordinary sense. In most shareholder arguments somebody has the votes. In a fifty-fifty company nobody does, and company law does not supply a tie-break. An ordinary resolution needs a majority of votes cast; fifty per cent is not a majority. A special resolution needs seventy-five per cent. Removal of a director under section 168 of the Companies Act 2006 requires an ordinary resolution, which the other founder can simply vote down.

So the statutory default is not a mechanism for breaking deadlock. It is a mechanism for confirming it.

Why the articles almost never cover it

Most fifty-fifty companies were incorporated on the model articles, which assume a board that can reach decisions and a shareholder body with a majority in it. They contain no casting vote for a chairman, no deadlock procedure and no mechanism for one founder to exit.

Even where a shareholders' agreement exists, it is frequently the agreement that was signed at incorporation to satisfy an accountant, and it deals with pre-emption on a transfer to a third party rather than with the situation where neither founder wants to sell and neither will agree.

The practical result is that the founders discover the gap at the worst possible moment, in the week they need a decision, with a lawyer reading the articles for the first time.

The mechanisms that actually work

These belong in the articles or the shareholders' agreement, and all of them are cheap to put in before there is an argument and very expensive to negotiate afterwards.

A chairman with a casting vote. The simplest tie-break at board level, and the least popular, because it hands the company to whoever holds the role. It works where the founders accept a rotation or appoint an agreed third party.

An independent third director. Not a casting vote but a genuine third voice, usually an experienced operator both founders respect. This is the mechanism most likely to prevent deadlock rather than resolve it, because a third person in the room changes how the argument is conducted.

Escalation then mediation. A clause requiring the founders to meet, then to mediate within a fixed period, before any exit mechanism can be triggered. It resolves more deadlocks than anything else on this list, mostly because the alternative is expensive.

A shoot-out clause. One founder names a price per share; the other chooses whether to buy or sell at that price. Variants run to sealed bids and Mexican shoot-outs. It is decisive and it is brutal, and it favours the founder with access to cash, which is worth understanding before agreeing to it.

Put and call options on defined events. Where one founder is executive and the other is not, options triggered on a defined event are usually fairer than a shoot-out, because the valuation basis is agreed in advance rather than in the middle of a row.

An agreed valuation method. Whatever exit mechanism is chosen, the argument moves to price. An agreed basis, with a named independent valuer and a fallback if that valuer is unavailable, removes the second deadlock before it starts. Getting this right is ordinary corporate structuring work, done years before anybody needs it.

When the only routes left are the court

Where there is no mechanism and no agreement, two statutory routes remain. Both are expensive, slow and public, and both are worth understanding precisely because they are what the alternative to a negotiated exit actually looks like.

The first is an unfair prejudice petition under section 994 of the Companies Act 2006. The threshold is conduct, not disagreement:

Deadlock on its own is not unfair prejudice. Being excluded from management, having information withheld, or watching the other founder divert opportunities usually is, and in a real breakdown those things tend to follow deadlock rather than precede it. The usual remedy is an order that one founder buys the other's shares at a valuation the court sets.

The second is a winding-up petition on the just and equitable ground in section 122 of the Insolvency Act 1986:

This is the remedy for irretrievable deadlock in a quasi-partnership, and it does exactly what it says: it ends the company. It is a solvent liquidation of a business that was working, and the founders divide what is left after costs. It is used as leverage far more often than it is used as a remedy, and it is available because a company whose constitution cannot produce a decision has stopped being a going concern in any meaningful sense.

What to do if you are in it now

Deal with the company before the shareholding. Identify the decisions that genuinely cannot wait, which is usually a much shorter list than it feels like: a bank mandate, a filing deadline, a contract renewal, payroll. Agree those individually and in writing, without prejudice to everything else. A deadlock that also becomes a default under a bank facility or a missed statutory filing is two problems.

Then get the valuation question moving, because every exit route ends there. Ownership of that sequence, and of the correspondence while it runs, is what an outsourced General Counsel does in a breakdown between founders: keeping the company filing, trading and paying while the shareholding is resolved separately.

Where a specialist is needed

An unfair prejudice petition or a winding-up petition is litigation, and Dinmore Bell instructs specialist counsel to conduct it while holding the commercial and corporate record the case runs on. A share valuation for a buy-out is a valuer's work, and the tax treatment of a buy-back or a share-for-share exchange is your accountant's, working from the structure we document.

Dinmore Bell provides an outsourced General Counsel function for founder-led businesses, owning work of this kind end to end rather than advising on it and handing it back.