1. Introduction
In Turkish law, "deadlock" refers to a situation in which the decision-making processes of a company are blocked due to a failure to reach agreement on fundamental issues among shareholders or members of the management body, particularly in joint stock and limited liability companies. In such cases, the company's bodies are unable to hold meetings, the quorum required for decision-making cannot be reached, or decisions taken cannot be implemented, ultimately rendering the company's activities dysfunctional. Deadlock situations arise particularly when there is joint control within the company and decisions cannot be made. Deadlock provisions are included in partnership agreements to prevent such lock-ups. In this article, the function and practical importance of these deadlock provisions will be examined.
2. The Emergence of Deadlock Provisions
Deadlock usually arises from conflicts of interest, differences of opinion, structural problems, financial difficulties, cultural differences, or distrust between the parties. However, not every disagreement creates a deadlock; what is important is that the situation reaches a point where it hinders the functioning of the company's organs. If the company's governing bodies can convene and make decisions in accordance with the rules, the fact that the decision is negative cannot be considered deadlock. Deadlock occurs when the governing bodies cannot form a consensus and the decision-making process is effectively blocked.
For deadlock to occur, the inability to make decisions must disrupt the company's operations. Therefore, the temporary inability to make decisions cannot always be considered deadlock. In some cases, the decision-making process may be delayed due to lengthy negotiations; however, in such cases, the issue is not the inability to make decisions but rather the prolongation of the preparatory and negotiation process prior to decision-making.
3. Disputes Arising from Deadlock
Deadlock not only prevents decisions from being made by company bodies, but can also lead to various disputes between the parties. The inability to make necessary decisions in the general assembly or board of directors can seriously disrupt the company's operations; in such cases, the board of directors cannot exercise its representative authority, investment decisions cannot be made, or strategic steps may be postponed. Pursuant to the Turkish Commercial Code No. 6102 ("TCC"), the special quorums and veto rights provided for in the articles of association are binding. Therefore, if the articles of association require the affirmative vote of a shareholder for certain decisions, a legally valid decision cannot be made if the relevant shareholder casts a negative vote or fails to attend the meeting. This results in a deadlock in the decision-making mechanism. If the exercise of the veto right constitutes a breach of the shareholders' agreement, the deadlock in the decision-making mechanism also constitutes a breach of the agreement. Depending on the nature of the dispute and the specific circumstances of the case, the relevant provision in the shareholders' agreement may be invoked as evidence in court against the party that exercises the veto right in a manner contrary to the agreement. On the other hand, since this situation constitutes a breach of obligation under the shareholders' agreement, additional legal consequences may also arise. When the balance of power between the majority and minority shareholders within a company is disrupted, the parties may resort to deadlocking as a means of exerting pressure on each other, which can lead to a loss of investor confidence and render the partnership unsustainable. If the parties are unable to resolve their differences among themselves, disputes may be brought before the courts or arbitration, a process that can negatively impact the company's value by generating high costs and prolonged uncertainty.
4. Function and Resolution Mechanisms of Deadlock Provisions
Deadlock provisions are strategic arrangements aimed at preventing disputes between partners from turning into permanent deadlocks. These provisions enable the parties to resolve deadlocks that arise in decision-making processes within the framework of predetermined rules. The first and most commonly used method is amicable resolution. The parties are given a certain period of time to seek a solution. In this context, it is common practice for negotiations to be conducted under the supervision of a neutral third party.
If a solution cannot be reached through amicable negotiation, the second stage is initiated; at this point, the withdrawal of one of the parties from the partnership through the transfer of shares may be envisaged. For this purpose, share transfer mechanisms, such as purchase and sale through open or closed auction, or the right of a specific partner to withdraw at a predetermined price, may be considered. In an open auction, the parties bid in the presence of a trusted third party, and the party making the highest bid becomes the owner of the shares. To ensure the fairness of the process, the contract must clearly stipulate who makes the first bid, the bidding increments, and how to proceed if one of the parties does not participate in the process. Similarly, in a closed auction, the parties submit their bids in sealed envelopes; the party offering the highest price is obliged to purchase the other party's shares. Here too, it is important to determine what course of action to take in the event of equal or invalid bids.
Finally, the "Texas Shootout" method, which was adopted from Anglo-Saxon law and is also used in Turkish practice, is foreseeable. In this method, one of the parties informs the other party of the price it has determined for its shares; the other party then either sells its shares at that price or is forced to purchase the other party's shares. While this method offers a practical solution for quickly resolving uncertainties between the parties, the priority of the notification, the timeframes, and the payment terms must be clearly and explicitly regulated.
5. Conclusion
Deadlock situations negatively affect the willingness of partners to continue the partnership by preventing critical decisions from being made and rendering the company inoperable. In particular, the existence of deadlock provisions in merger and acquisition processes reduces the risk of deadlock, ensures the continuity of the company, and strengthens trust between partners. Conversely, the absence of written and pre-determined resolution mechanisms may lead to new disputes over the resolution of deadlock and exacerbate the existing crisis. Therefore, it is of great importance to obtain professional legal support to ensure that such arrangements are legally structured correctly and to prevent potential deadlocks.
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.
