Deadlock provision

A deadlock provision, or deadlock resolution clause, is a contractual clause or series of clauses in a shareholders' agreement or other form of joint venture agreement which determines how disagreements on key issues are to be resolved in relation to the management of the enterprise.

Deadlock provisions vary enormously between different countries and with respect to different types of transactions. However, characteristically the format of the provision will be as follows:

  1. Certain "key matters" will be designated as matters upon which deadlocks can arise. These will usually be fairly fundamental matters relating to the management and control of the business.
  2. The provisions will then indicate if a "key matter" is raised at a certain number of consecutive meetings (occasionally just one meeting, but more often two or three) of the board of directors or other management organ of the business, a deadlock is said to have arisen.
  3. The two parties may then be asked to summarise their differences in writing, and ordinarily senior personnel on either side will meet to try to find an amicable resolution to the deadlock. The provisions may require that a mediator may or shall be involved.
  4. If the parties fail to find an amicable solution, then the termination provisions will normally operate.

The main focus of most deadlock provisions are the termination provisions. The principle underlying them is that a successful business enterprise should not be destroyed solely because the two partners are unable to agree on a core issue; the value of the business as a going concern should be preserved, and a fair way should be found to allow one party to bow out with fair recompense for giving up their share in the venture.

There are as many different types of termination provisions as the ingenuity of lawyers can create. However, a number of specific types of termination provisions have come to be used fairly regularly in commercial transactions where the parties are of equal standing in the venture, and have acquired characteristically descriptive names.

Often the drafting of the deadlock provisions will depend to a great extent upon what the "key issues" that the parties want to ensure consensus upon are.