In some limited liability companies (sp. z o.o.), shareholders decide to divide the shares equally. A classic example is a company with two shareholders, each holding 50% of the shares. In such cases, a so-called deadlock may arise, i.e. a decision-making stalemate within the company. The shareholders are then unable to adopt a resolution, most often due to an equal split of votes (one shareholder votes “in favor” and the other “against,” with each vote carrying the same weight).
Contrary to appearances, these situations do not occur only in large companies or in connection with multi-million decisions. Decision-making deadlocks also arise in ordinary, family-owned companies and may concern, for example, decisions on obliging shareholders to make additional contributions, increasing the company’s share capital, or changing the company’s registered office. How, then, can one protect against the consequences of a deadlock in the company?
What is an anti-deadlock clause in a limited liability company agreement?
An anti-deadlock clause is a set of provisions included in the company agreement that specify:
Such a decision-making stalemate most often arises in the event of a conflict between shareholders or conflicting shareholder interests with respect to the matter being voted on. One can imagine a situation in which one shareholder is in favor of injecting additional capital into the company—through additional contributions, a loan, or an increase of the share capital—due to investment or development plans, while another shareholder, on the contrary, wishes to maintain the status quo and avoid exposing the company to financial burdens or risk at a given time. In such a case, one shareholder will often vote “in favor” (e.g. of increasing the share capital), while the other will vote “against.”
The purpose of an anti-deadlock clause is therefore ultimately to enable the company to “move forward” and make a decision (most often by way of a shareholders’ resolution) despite the decision-making impasse resulting from an equal number of votes.
What mechanisms may an anti-deadlock clause provide for?
Deadlock is not a concept defined under Polish law, and the Commercial Companies Code does not contain provisions that directly regulate deadlocks. Therefore, all regulations concerning deadlock that are included in a company agreement result from the principle of freedom of contract.
An anti-deadlock clause may therefore take various forms. The most commonly used solutions provided for under anti-deadlock clauses can be divided into:
Regardless of the mechanism chosen, the most important issue is to define in the company agreement when a deadlock is deemed to have actually occurred (i.e. which events must take place in order for a decision-making impasse to be recognized, allowing the anti-deadlock procedure to be triggered). Most often, the company agreement will require, for example, the convening of another shareholders’ meeting and a renewed attempt to adopt a resolution, or the conduct of mediation involving an external arbitrator or lawyer. Only the failure to resolve the deadlock despite such a “remedial procedure” will entitle the parties to invoke the anti-deadlock clause.
Can a decisive vote be granted to a shareholder under an anti-deadlock clause?
Yes. One of the more popular anti-deadlock mechanisms that allows the existing shareholding structure to be maintained while at the same time enabling a decision to be made is granting one of the shareholders a decisive vote in a given matter.
Technically, the company agreement may, for example, stipulate that for resolutions concerning specific issues (e.g. incurring a loan or credit exceeding PLN 100,000), the vote of one specifically named shareholder is decisive. Such a provision may take the form of granting special rights to a shareholder (Article 159 of the Commercial Companies Code).
Alternatively, it is possible to grant preference to a shareholder’s shares with respect to voting rights in specific matters (e.g. the appointment or dismissal of management board members or increases of the company’s share capital). In such a case, when voting on the specified matters, each vote of the privileged shareholder will count as two or three votes (depending on the extent of the preference).
Russian roulette – the exit of one shareholder from the company
The Russian roulette mechanism under an anti-deadlock clause involves forcing one of the shareholders affected by the decision-making impasse to exit the company. It is therefore an effective anti-deadlock mechanism, but one that results in a change to the ownership structure of the limited liability company. As a result of its application, one of the shareholders must leave the company.
The Russian roulette mechanism operates in three steps:
It should be borne in mind that in a Russian roulette mechanism, the initiating shareholder (i.e. the one who declares the intention to use it) does not know whether they will ultimately be the buyer of the other shareholder’s shares or the seller of their own shares. For this reason, they are compelled to propose a fair, market-based price for the shares.
Texas shoot-out – the exit of one shareholder from the company
The Texas shoot-out mechanism, like Russian roulette, is designed to eliminate one of the shareholders involved in a decision-making deadlock.
The Texas shoot-out mechanism operates in three steps:
Anti-deadlock clause – key provisions in the case of equal shareholdings
If it is planned that shares in a limited liability company will be divided equally among shareholders, it is worth introducing an anti-deadlock mechanism into the company agreement. Otherwise, if a decision-making impasse arises, the shareholders will not have practical tools at their disposal to bring such a stalemate to an end.
When concluding a contract for the sale of shares in a limited liability company, it is not uncommon to overlook legal provisions operating outside the regime of the Commercial Companies Code and the Civil Code. Wrongly.
The share capital of a limited liability company does not have to be covered solely by cash contributions. It sometimes happens that a shareholder, instead of money, wishes to offer the company, for example, real estate, a vehicle, know-how, or the right to a trademark. Such a solution is possible, although not in every case.
