Shareholders in disagreement: how do you break a deadlock?

1. Qualifying the deadlock

It all starts with a precise diagnosis. Two 50% shareholders who no longer vote together, a minority shareholder with a blocking minority on extraordinary decisions, a manager who no longer convenes the shareholders: these situations do not call for the same responses. A strategic disagreement, even a lasting one, must also be distinguished from genuine paralysis. A company that keeps running, whose accounts are approved and whose manager acts within their powers is not deadlocked in the sense the courts understand it.

2. Rereading the articles and the shareholders’ agreement before writing

The first letter sent to the other shareholder sets the tone for what follows. Before writing it, you need to know what the documents provide: applicable majorities, prior mediation clause, pre-emption, approval, promises to sell, compulsory exit clause, exclusion clause, share valuation method. Sometimes the solution has already been drafted and nobody has reread it since incorporation. Conversely, a clause triggered incorrectly (missed deadline, incomplete notice) can backfire on the party relying on it.

3. Exit clauses to activate

Some shareholders’ agreements organise the way out of a deadlock. The so-called buy or sell (or shotgun) clause lets one shareholder offer a price for the other’s shares; the other must then either sell at that price or buy the offeror’s shares at the same price. The mechanism pushes towards a fair price, since the party setting it does not know which side it will end up on. It does, however, assume that both shareholders can finance a buy-out; otherwise it favours the one with the deeper pockets.

Where the value of the shares is disputed in the cases provided for by law or the articles, it is set by an expert appointed by the parties or, failing agreement, by the president of the court, who applies the valuation rules laid down in the articles or in any agreement between the parties (Article 1843-4 of the French Civil Code). A shareholders’ agreement with a clear valuation method avoids a long and costly expert valuation.

4. Exclusion and compulsory transfer

In an SAS, the articles may provide that a shareholder will be required to sell their shares, under the conditions they set, and suspend that shareholder’s non-financial rights until the sale (Article L. 227-16 of the French Commercial Code). They may also target a shareholder whose control changes (Article L. 227-17). The clause still has to exist, the exclusion event has to be precisely defined and the procedure laid down (information, right to be heard, majority, price) has to be followed to the letter.

In an SARL, the law provides no equivalent mechanism. Exclusion clauses in the articles are sometimes found, but their validity remains debated. The exit is negotiated, or goes through the court.

5. Negotiating the exit

Most deadlocks are settled with a price. The shares are bought by the other shareholder, by a third party or by the company itself through a capital reduction. Negotiation covers the value of the shares and all the commitments that bind the departing shareholder to the company. The whole is set out in a settlement agreement covering every outstanding point, then in the share transfer documents.

A third party can unblock a stalled negotiation. Mediation, contractual or proposed by the court, reopens dialogue without waiving anyone’s rights.

6. Court remedies

The court may set aside a decision taken in the exclusive interest of a group of shareholders, to the detriment of the others, and contrary to the company’s interest (abuse of majority). It may also sanction a minority shareholder who, in their own interest alone, opposes a transaction essential to the company (abuse of minority); it can then appoint a representative to vote in their place in a direction consistent with the company’s interest.

In the most serious situations, where the normal functioning of the company has become impossible and the company faces imminent danger, the court may appoint a provisional administrator who runs the company in place of its managers. The measure is exceptional and temporary.

As a last resort, a shareholder may ask for the early dissolution of the company on just grounds, in particular where disagreement between shareholders paralyses its functioning (Article 1844-7, 5° of the French Civil Code). The court checks that the paralysis is real, and a shareholder who caused the disagreement cannot rely on it. Dissolution ends the company. Both sides usually have an interest in avoiding it, and the prospect alone is often enough to restart negotiation.

7. During the dispute, keep the company running

The dispute suspends no obligation. Accounts must be drawn up, submitted to the shareholders and filed, shareholders kept informed, decisions recorded. A manager caught up in a dispute still acts in the company’s interest. Every failure becomes an exhibit in the other side’s file.

8. Preventing the next deadlock

A deadlock is easier to prevent than to resolve. A well-built shareholders’ agreement provides a valuation method, a prior mediation clause, an exit mechanism and a tie-break rule for day-to-day decisions. These clauses are negotiated in calm conditions, while everyone gets along. That is when they cost least.

Frequently asked questions

See also: the shareholders’ agreement; share transfer approval; the share sale

This information is general and does not constitute legal advice. Every transaction calls for its own analysis.