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.

Similar Articles
Relevancy Powered by MondaqAI
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”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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