New Zealand: Disputes and Deadlock between Shareholders

For the shareholders involved, the period of disagreement is often stressful, resulting in their spending valuable time at loggerheads with each other. This invariably creates an inharmonious working environment often to the detriment of the goodwill of the business and staff morale.

Ultimately the bickering shareholders may cause the business to run into financial difficulty (if that itself has not been one of the causes of the disagreement).

In most cases where the parties have to resort to their lawyers or even the Courts to resolve their disagreement, we have found that "off the shelf" shareholders agreements (on the occasions when one has been put in place) are often unhelpful in that either the dispute resolution provisions themselves are inadequate and lack teeth (for example, negotiation and mediation can be blunt instruments) or they do not properly address the issues of deadlock between the shareholders. In short they do not facilitate a quick resolution of the issue at hand.

A well prepared shareholders agreement by contrast will usually set out the framework within which a company intends to operate. It ought to include provisions which address matters such as the management and control of the company, funding structure, voting rights, the terms on which shares can be transferred, exit strategy upon the death or incapacitation of a shareholder, dividend policy, dispute resolution and a deadlock resolution provision.

A considered shareholders agreement, with the appropriate dispute resolution and deadlock provisions, can mean the difference between resolving the problem (perhaps by the swift exit of one shareholder) or the untimely demise of the business - usually to all parties' detriment.

In the absence of these provisions it should be noted that unless one party has acted unlawfully or in breach of contract (or perhaps where a director has breached its duties), the parties may not have effective recourse to the Courts to settle the dispute; indeed the Courts have been increasingly reluctant to appoint a liquidator as a means of addressing issues between shareholders.

In any event litigation is likely to be very expensive and time consuming and, again, it is very likely to have an adverse financial impact on the business.

There are a number of mechanisms that can be adopted to resolve deadlock - the mechanism which should best be adopted for any particular business is dependent on several factors including the type of business, company structure and relative financial strength of the shareholders. The most common deadlock breaking mechanisms include the following (or combinations or variations of these):

  1. "Russian Roulette" – under this procedure, any party can serve a notice either requiring the receiving party to purchase that party's shares or for the receiving party to sell its shares to the initiating party, at a specified price. The party receiving the notice then has the option of selling its shares at the price offered or advising the other party that it wishes to buy the other party's shares at the offered price. The rationale underpinning this type of provision is to ensure that a fair price is offered as the offeror ultimately does not know whether it will be the seller or the buyer of the shares.
  2. This mechanism has its strengths but if a party lacks the financial ability to purchase the shares (and therefore be left with no option but to sell the shares), then it will be at a significant disadvantage. The "weaker" shareholder will run the risk that the stronger party takes advantage of it and buy out the "weaker" party at a low price, knowing that the "weaker" party does not have the capacity to compete.

  1. An "Auction" or "Texan Shoot-Out" - in an auction or so called "shoot out" the initiating party will notify the other(s) that it wishes to acquire their shares. The receiving party will then normally have a certain period within which to decide if it intends to sell its shares or buy the initiating party's shares. If the other party also wishes to buy, both parties will then participate in an open auction or "Shoot-Out". This mechanism will only work equitably if the parties are of similar financial strength.
  2. "Buy Out" - This involves a mechanism where one shareholder can be quickly bought out by the other parties. While such a mechanism is quite uncommon as a means of breaking deadlock (and is more likely linked to the non-performance by a party if its obligations under a shareholders agreement, which non performance typically gives the "non-defaulting" parties the right to acquire the "defaulters" shares) it can still be effective in certain circumstances. If this mechanism is used it will also be necessary to include an efficient means of establishing the price for the other party's shares – this is more easily ascertained by reference to a pre determined formula, rather than involving an independent valuation which will be more time consuming.
  3. "Put and Call" Options – A "Put" option enables a shareholder to require another shareholder to purchase its shares at a certain price. A "Call" option on the other hand allows a shareholder to compel the other shareholder(s) to sell their shares
  4. "Put and Call" Options are probably not such an effective option for a company comprising shareholders of equal stakes. However, "Put" options in particular may be advantageous for a minority shareholder who perceives that the happening of certain events may weaken its position. Conversely a call option may be favoured by a majority shareholder who wants to take a certain course of action which may otherwise be impeded by a minority shareholder.

    The key to "Put" and "Call" option arrangements working well is clearly specifying when and how the option may be exercised, and agreeing on the price at which the option may be exercised at the outset.

  1. Liquidation - For some businesses, the parties may wish to provide for a regime that requires the shareholders to liquidate the company in the event of deadlock and to share the costs and expense of so doing. Liquidation however may not be an attractive option if a large element of the value of the business is "goodwill" and dependent heavily on its continuing as a going concern.

Whatever the mechanism chosen, it is also important to clearly define what constitutes a "deadlock" the occurrence of which will trigger the operation of the relevant provision.

Whilst there are pros and cons with each of the different deadlock provisions (and in particular none may satisfactorily deal with a disparity in the shareholders financial capability), it is imperative to select the mechanism which the shareholders believe is appropriate in the circumstances, questions of "what if...?" can be beneficial at the preparation stage of the shareholders agreement and can provide a useful framework for the parties to understand their respective objectives and how an impasse can be managed going forwards.

In summary, it is by far preferable to invest the time upfront to consider the terms of a shareholder agreement, in particular to select a dispute/ deadlock breaking mechanism to ensure that should circumstances change, a resolution can be reached quickly and to allow the company to move forwards without the distraction of a prolonged dispute which can be both emotionally and financially draining.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions