Introduction

The possibility of collapse in the relationship between business partners is a commercial risk that cannot be ignored. In particular, joint venture companies and other legal entities established for a specific commercial purpose may be prone to this. Such deadlock, if not resolved decisively may come at a significant loss to the business partners involved.

This is particularly common in enterprises that are companies by legal form only, but are in actual sense operated and managed more like a partnership. Usually, this may involve equal shareholding or management rights.

When Deadlock Arises

Deadlock in companies generally arises when a company has two or two groups of shareholders with equal voting rights and directors (in the case of two shareholders the most common scenario occurs when the two shareholders are also directors themselves) and such two or two groups of shareholders are unable to agree on future conduct. This would happen when the two shareholders or the two groups of shareholders take divergent views and are unwilling to budge.

This may arise at a time when the articles of association of such a company are silent on how to resolve a deadlock or the company has no shareholders agreement, or if it has, there is no provision in the shareholders agreement on how to resolve a deadlock.

How to resolve a deadlock

A deadlock can be unlocked through a court mechanism or through an out of court solution. For the latter, it is advisable to foresee potential for a deadlock and have clear provisions on how to resolve such a deadlock in the articles of association of the company or in the shareholders agreement.

Court Solution

This is mainly through unfair prejudice petitions or equitable winding up of the company by the High Court. In Kenya, equitable winding up petitions are provided for under the Insolvency Act, No. 16 of 2015. Unfair prejudice petitions are provided for under the Companies Act, 2015.

Equitable Winding Up Petitions

Under the Insolvency Act, the High Court is empowered to order the liquidation of a company where it “is of the opinion that it is just and equitable” to do so. This provision grants the Court wide discretion to consider the specific circumstances of the case to determine whether such liquidation is appropriate.

It should, however, be noted that the Court in arriving at its decision would consider whether the petitioner had alternative appropriate remedies before allowing such a petition. This is to prevent the abusive use of this petition as a means of exerting undue pressure on a company. Courts have held in the past that they would consider, among others, how the company is being run, paying particular attention to those companies that are run in a manner involving personal relationships and mutual confidence; and the restriction of transfers of members’ interests such that a loss in confidence in a business partner would inevitably result in a loss.

Unfair Prejudice Petitions

The Companies Act, 2015 enables the member of any company to apply to the High Court on the basis of the company’s affairs being run in an oppressive or unfairly prejudicial manner to the interests of members generally or some portion of them or that some actual or proposed act or omission would so prejudicial or oppressive. The High Court may make any orders it deems appropriate to remedy such prejudice, if the allegations are substantiated. Any such orders granted must be lodged with the Registrar of Companies as well to facilitate their effect.

Some possible remedies include but are not limited to:

• Regulating the future conduct of the company’s affairs
• Requiring the company to refrain from an act complained of, or do an act it has omitted to do
• Authorize derivative claims by company members on terms as the Court may dictate
• Restrict the alteration of the company’s articles of association without the leave of the Court
• Order the purchase of shares held by given members of the company by other members of the company or even the company itself.

Out-of-Court Solutions

It is advisable for companies (especially companies with two shareholders or two groups of shareholders with equal voting rights) to consider the following solutions with a view to unlocking any potential deadlock (and in so doing avoid taking more drastic action as explained above):

• Provide for a chairman’s casting vote. It should also be noted that, although this may unlock a deadlock, it gives the party whom appoints the chairman advantage, which effectively defeats the intention of having joint decision making control.
• Provide for an outsider’s vote. This contemplates a situation whereby an independent third party will be appointed to assist in the decision-making process where a deadlock arises. In most cases, this will be a non-executive director or chief executive officers.
• Provide for mutual put and call options. This means that a shareholder has the right on notice, after the occurrence of a deadlock, to require the other to purchase or sell his shares respectively within a stated period in accordance with an agreed mechanism.
• Arbitration or expert resolution. This mode of breaking deadlock is only ideal for factual matters. 

Conclusion

As much as there lies judicial solutions to address deadlock matters, it is recommended to foresee such issues and make clear provisions for unlocking such deadlocks in the articles of association of a company or shareholders agreement.