Deadlocked Companies – Judges Have Power to End Paralysis

Companies in which no one has a controlling interest can easily become deadlocked if shareholders fall out. However, judges have a range of powers to bring such paralysis to an end and enable all concerned to move on with their lives.

One High Court case exactly on point concerned a pipe fitting company in which two men each held 50 per cent of the shares. They were also co-directors but, after their business relationship ended acrimoniously, one of them (shareholder A) claimed that he had been excluded from the company. The other (shareholder B) had stopped his salary and purported to terminate his employment.

After shareholder A launched proceedings, the Court found that the company was deadlocked, within the meaning of Section 994 of the Companies Act 2006, and that its affairs were being conducted in such a manner as to constitute unfair prejudice to both shareholders.

The Court made an order under Section 996 of the Act, requiring shareholder B to buy out shareholder A. They could not, however, agree an appropriate price for the shares. In the circumstances, the Court put a value on the company on the basis of expert evidence and made rulings as to any deductions that should be made to the sum payable to shareholder A. The men were encouraged to resolve any remaining issues by agreement so that their lawyers could precisely calculate the sum due.