As promised, this week we’re focusing on what happens when there’s an irresolvable deadlock between a company’s shareholders who have an agreement with one of these provisions.
When shareholders simply cannot agree, and the conflict is deemed irresolvable, one of the parties may serve a notice offering to purchase or sell at a specified price.
For example, A and B each hold 50 shares in Comp Ltd. They fall out.
A serves notice on B offering to transfer all A’s shares in the company to B at a price specified by A.
B must accept A’s offer and buy A’s shares at the stated price or must sell all his shares to A at the same price per share.
Also called a Mexican shoot out. It is a variation of a Russian roulette provision where typically A and B submit sealed bids to an “auctioneer” and the party who makes the higher bid buys the company at that price.
Both Russian Roulette and Texas Shootout only really operate fairly if the parties are of approximately equal financial strength, the shares of the other are affordable, and neither has a unique role in the company.
If Russian Roulette or Texas Shootout are not going to be appropriate mechanisms, a shareholders agreement can also provide for a valuation of the shares and a sale to the remaining shareholder(s), or to the outside world.
But what if A and B don’t have a shareholders agreement? We’ll explore that next week.