Disputes between 50/50 shareholders (partnerships) pose a great risk to the success of the business. As both partners hold equal weight in the argument, there is a high possibility of deadlock should they fail to meet in agreement. Fortunately, there are options to help curb the possibility of this occurring. Though, the best way to avoid these situations in the first place is to discuss any concerns openly when possible. However, here we break these down the options available to break deadlock should it occur.
Dispute resolution clause
As with any partnership, a shareholders agreement will outline the key clauses of the relationship. Within these will be a dispute resolution clause. As the name suggests, this clause will outline the procedure in the case of a deadlock. The most common options will include:
- Mandatory mediation, or
- Arbitration, or
- Specific compromise.
The last of these options, specific compromise, may take several forms. Namely, these will deal with the disbanding of the partnership. While these are effective, they are the last resort. Mediation and arbitration pose the best chance to resolve the situation and for the partnership to continue operating. However, should this fail, below we provide the most common resolution.
Buy out resolution
The most common resolution is for one partner to offer to buy out the other. This will dissolve the partnership, but the business will continue. However, it is important that the offer is a fair price. Often the shareholders’ agreement will state how this fair price is calculated. However, once this offer is made the option remains for a counter offer. The other partner may want to remain in the business and would prefer to buy the other partner out.
Though, it would be recommended where possible to avoid this option. Just as 50/50 shareholders split the proceeds of the business 50/50, they also split the liabilities. Owning 100% of the business means the remaining owner will take on all liabilities as the sole-owner. So, ensure that during the partnership every effort is made to avoid disputes before they arise.
Final thoughts
Disputes will naturally occur in the course of a business partnership. It is the responsibility of the owners to resolve these before any of the actions we have discussed are required. Likewise, ensure that within the shareholders’ agreement these dispute resolutions are specifically outlined. If there aren’t any, or no resolution is achieved, legal action may be taken in court. This will result in increased costs, time and likely a mandated outcome that could have been achieved through negotiation.
If you are looking to start a business as a partnership, discuss these situations with your partner openly. Likewise, contact a lawyer to discuss including these clauses within your shareholder’ agreement.
