It can often happen, especially in small companies, that the directors get locked in a stalemate situation and cannot make effective decisions.
The legal situation is that companies are run by their directors who collectively make decisions at board meetings. If there is a difference in opinion, then a vote can be taken at a board meeting and a decision is passed by a simple majority of directors present.
However, what happens when there are the same numbers of directors voting in favour of a decision as against it? Then no new decision can be made and so the existing status quo continues.
So what can be done to break the deadlock? The first thing to look at is the company’s articles as these will have clauses saying how directors can make decisions and how board meetings should be run. If board decisions are not made in accordance with the Articles, then they are not valid and have no effect.
Particular things that can help break the deadlock are as follows: Conflicts of interest
It may be that a director who is under a conflict of interest concerning a particular matter is not allowed to vote on that issue. However, this depends on what the Articles say. For example, some Articles say that, as long as a director has declared his interest, he can still vote on it, but others will not. Delegated Powers
The board can delegate some of its decision-making powers to a particular director or group of directors. If this has been done then that director can still continue to make those decisions in the event of a deadlock as, unless the directors vote to change the situation, the status quo continues.
The delegation of powers does not need to be in writing. This tends to mean that, if a particular director has been in the habit of making certain decisions without the board objecting, then he can continue to do so. However, there can often be disagreement over whether a particular power has been delegated or not. Casting Votes
In some companies’ Articles, the board can appoint a chairman and he will have the casting vote in the event of a deadlock. If this is the case, you should also look at how a chairman is appointed. Sometimes a chairman is decided at the beginning of each meeting and sometimes the same person acts as chairman all the time. Shareholders
If none of these helps, you may need to consider whether the shareholders can intervene and make a difference. At a shareholders’ meeting, the voting power depends on the number of voting shares, and these may differ from the voting powers at a board meeting.
For example, it may be that there is a company with the same two people as directors and shareholders but one has 51% of the shares and the other 49%. In such a situation, there will be deadlock when it comes to a Board decision but the shareholder with 51% has the power to make decisions at a shareholders’ meeting.
In most cases, the shareholders have the power to direct the directors to act in a particular way and make particular decisions. The shareholders also have the power to remove a director. Persuasion and Politics
Finally, directors should not forget that there will often be arguments and room for persuasion at board meetings and shareholders’ meetings. Often, it is a good idea to canvass support before the meeting.
Whatever your differences are on a particular matter, it is usually in the interests of directors to continue working together. If you resigned, would the others be able to continue without your input?
Ultimately, if a serious deadlock situation arises, it may be time to shut down the company. A court could order it if the board can no longer effectively run the company.
It is often useful to remind the other director(s) of the effect on them of the company shutting down unless you can work together. They may have personal guarantees that would be called in, they may have ongoing liabilities under a lease or they may have made loans to the company which would then be unlikely to be repaid. These risks may be enough to persuade them that cooperation is better than shutting down the company. Obtain Legal Advice
If you are in a deadlock position, we can help by advising you on your legal position, your strengths and weaknesses and a strategy to adopt. This can help make all the difference. Gary Cousins