DECISIONAL DEADLOCK IN CORPORATIONS

What is a decision deadlock?

Decisional deadlock occurs when the governing bodies of a company fail to make decisions due to lack of necessary majorities. This can occur due to disagreement among shareholders or directors, or due to their inertia in corporate activities. Conflicts can arise for various reasons, such as divergent visions or different economic interests. Such a scenario is even more possible and evident in the presence of equal partners (50%-50%). Stalemate situations ultimately result in the unfeasibility of the objectives of the business activity.

What are the possible solutions

The best way to avoid deadlock situations is to anticipate them through the adoption of some preventive measures. The first remedy is the introduction of deadlock clauses in the statute or in shareholders' agreements. The latter aim to stabilize ownership structures or govern the company. Deadlock clauses come in various forms, such as those that provide for mechanisms of consultation and preventive conciliation, up to the casting vote, which allows a shareholder to have the decisive vote in the event of a deadlock, often not easily predictable, as it implies the subordinate position of one or more shareholders towards others. It is more complicated to foresee that the deadlock decision is delegated to third parties outside the company. Sometimes the best solution has been found in granting one or more shareholders a put option, i.e., the right to sell their shares at a predetermined (or determinable) price, or a call option whereby one or more shareholders have the right to purchase the shares of others. There is also the so-called Russian roulette clause, which envisages that in the event of a deadlock, one shareholder may require the other to choose between buying the offering shareholder's stake at the price proposed by him or selling his own stake to him at the same price. Another possible deadlock solution is related to the statutory discipline of the right of withdrawal, with the provision of additional withdrawal scenarios, in addition to those provided by law, taking into account possible conflicts among shareholders.

A practical example of employing the Russian roulette clause

* In the last few days, the press has reported on a corporate deadlock situation involving a well-known Italian singer and his partner in the management of the company that publishes a popular podcast. One of the two equal partners offered to take over the shares of the other partner, thus activating the Russian roulette clause. The partner who received the offer, by refusing to sell his shares, found himself in a position to buy the shares of the bidder who, in turn, refused to sell them. The matter resulted in precautionary proceedings. This demonstrates that the Russian roulette clause is a rather complex mechanism to manage, both in the preventive phase and, in some cases, in the enforcement phase.

Conclusions

In the lifetime of a company, it is more frequent than people think to be facing deadlock situations. In such cases, the activity may have negative implications both in terms of results and internal relations. Therefore, before starting an activity in company form, it would be worthwhile investing time in the design and planning phase of the best possible set-up