Difficulties arise when they cease to be able to agree on things.  Then there is stalemate or deadlock.  One of the purposes of a shareholders’ agreement is to provide a resolution for that deadlock.

The solutions normally adopted are based on one of the shareholders taking complete control of the company and the other giving up his shareholding (at a price).

None of the solutions is an easy way out; all of them involve an element of risk and either party may be the winner or the loser. But the draconian nature of the solutions may sometimes help the shareholders to reach some sort of compromise rather than adopt one of the solutions.

The usual solutions are:

Russian Roulette

The advantages of this mechanism are that it provides a quick solution to the deadlock and does not involve appointing a third party to value the shares. Its disadvantage is that it may encourage a shareholder to engineer a deadlock.

The shareholders’ agreement will set out the method of valuing the shares if one of the shareholders serves notice exercising the option.

 
This solution favours the shareholder who is prepared to take the initiative; he can decide whether he wants to buy out the other shareholder or whether he wants to be bought out.

An issue for both parties is that the valuation mechanism may not produce a price for the shares which they like.
It’s possible that one of the parties may use this mechanism even where there is no deadlock unless the shareholders’ agreement makes it clear that it may only be used in a deadlock situation.

Texas or Mexican Shootout

Winding Up

A winding up may be the only viable solution where the shareholders’ involvement in the company is personal and assets which they have made available to the company are to be returned to them.

Other Possibilities

Chairman’s Casting Vote: The company’s articles may give the chairman a casting vote. The disadvantage in this is that the shareholder who is the chairman of any meeting will always be able to outvote the other shareholder. Few two shareholder companies want to start off with that imbalance.

Independent Third Party: The shareholders could appoint an independent non-executive director, but it may be difficult to find someone willing to take on that role.

Arbitration or Expert Resolution: This is often seen as the solution to all ills, but in reality it will only work where there is a dispute as to some fact, rather than a difference of opinion on how the business should be taken forward (where the is no 'correct' answer).

Alternative Dispute Resolution: This may work whether both shareholders want to find an amicable solution but need the help of an independent facilitator to reach agreement on how to take the business forward or on how to part company. If, however, one of the parties is awkward and there is no goodwill between them it is unlikely to provide a solution to the problem.

Escalation of Disputes: If the two shareholders are companies rather than individuals, the issue may be referred to senior members of each company’s board. Of course, they may not be able to agree either.  This should only be an interim step and another method of resolving the deadlock needs to be included in the shareholders’ agreement in case this doesn’t work.