Deadlocks: mechanisms for preventing and resolving conflicts in business. And what does "Texas Shootout" have to do with it?
In the summer, the startup community of Kazakhstan was stirred up by the news about a difficult situation within the startup Qtap, which concerned a conflict within the project team. Such situations when business partners cannot come to a consensus are not uncommon in legal practice and are called "deadlocks". From our practice, such situations most often occur in young companies and startups, where business partners have not yet fully worked with each other. Such situations are especially dangerous when it comes to decisions that require efficiency and are critical for the company.
In this article, we will talk about the circumstances under which deadlock is most likely to occur, the possibilities for resolving it, as well as how to prevent such a situation.
Given the importance of the deadlock problem for businesses, mechanisms to prevent and resolve deadlocks are widely used in Western countries. Companies actively include provisions in corporate agreements to address and prevent such conflicts.
In Kazakhstan, the situation is different. Although the law expressly provides for the possibility of including in the charter a procedure for resolving hopeless situations, partners often do not pay due attention to such issues, avoiding discussion about potential conflicts at the stage of business formation. Moreover, Kazakhstani legislation, apart from a general provision, does not include specific norms or methods for resolving deadlocks, and the term "hopeless situation" itself is not defined.
However, despite the absence of direct rules, the law provides the parties with freedom of choice. They can independently establish the procedure and methods for regulating corporate relations, using the principle of freedom of contract enshrined in the Civil Code of the Republic of Kazakhstan, which allows the parties to enter into agreements that do not contradict the law.
Circumstances in which deadlocks are especially likely
Deadlocks between business partners can arise on any issues on which the partners have contradictory views, and at the same time, due to the company's statutory provisions or legislation, there is no mechanism adequate to reach a final decision.
The most typical situation leading to a deadlock arises when several participants in the company hold equal shares, and there is no majority shareholder (for example, in a 50/50 structure) or when minority shareholders collectively own a share equal to the share of the majority shareholder (for example, 25/25/50). In such cases, it is necessary to understand that such an ownership structure not only seems fair, but also carries risks for the company, as it can complicate decision-making.
Ways to prevent and resolve deadlocks
The best way to address deadlocks is to prevent them. Deadlock prevention is the most effective method for stable and successful business, maintaining corporate relations and prompt decision-making without freezing the company's activities. Prevention refers to the introduction of mechanisms and structuring of partner relations in such a way as to reduce the likelihood of deadlocks.
For example, in a company with three partners with shares of 45%, 35%, and 20%, it is possible to set a requirement of 55% of votes for key decisions. This allows two partners (e.g. 45% and 35%) to make an important decision with 80% of the votes. If one of the partners with 45% or 35% disagrees, they can team up with the partner holding 20% to gain at least 55% and make a decision, which allows you to flexibly resolve issues without dead ends.
Partners can also agree in advance on the distribution of votes or the appointment of a decisive vote in case of a tie. It is important to clearly define the list of issues to which such a distribution of votes applies in order to minimize the risk of deadlocks and ensure stable management of the company.
Resolution refers to situations where a deadlock has already occurred., and the parties follow a pre-agreed order of interaction. For example, if it is impossible to come to an agreement, partners can use the Texas Shootout mechanism. According to this method, one of the partners offers a price for the redemption of the other's share. The second party either agrees to sell its share at the offered price, or buys out the share of the first partner at the same price. This encourages a fair bid and helps to quickly resolve the impasse.
Another example is an option agreement (Put and Call options). Partners can agree in advance that in the event of a deadlock, one of the parties has the right to buy out the other's share according to a pre-agreed formula or conditions. Such an approach allows the parties to break the impasse when agreement on an important issue is impossible.
An independent arbitrator can also be used to help make a decision in the interests of both parties. This method is especially useful for strategically important decisions that require an objective assessment.
Thus, there are many ways to prevent and resolve deadlocks, but it is important to fix them in advance in the partnership agreement or the company's charter. Such provisions can be established both when creating a business and at any stage of its activity, and can apply to both all participants and specific individuals. Partnership agreements with prescribed mechanisms for resolving deadlocks bring clarity to corporate relations, especially when the law does not provide clear instructions. Even if the dispute between the partners goes to court, the presence of such an agreement helps the court to understand the intentions of the parties and make a decision based on their agreements. This strengthens the legal position of the parties and gives weight to the pre-agreed approach.
Author: Zhanture Tashkaraev
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