Smart strategies for breaking a company’s corporate deadlock

Acorporate deadlock means a stalemate as a result of the shareholders or directors of a company unwilling to compromise with each other over a disagreement or a dispute among themselves, thereby rendering the shareholders’ meeting or the board of directors unable to make effective decisions, so that the company cannot carry out normal operations, and even becomes paralysed.

The Company Law does not provide for corporate deadlocks. Instead, it adopts a concept that “the management and operations of a company are in severe difficulty”, which covers, without limitations, corporate deadlocks. A corporate deadlock will create great harm if it is not resolved promptly.

Exercising appraisal rights

The appraisal right of a shareholder, also known as “mandatory equity replacement”, means a shareholder, being a party to a corporate deadlock, requests the company or other shareholders to acquire its stake at a reasonable price, which in turn enables the shareholder to retire from the company for the purpose of resolving the corporate deadlock.

Contemporary English and American courts are most willing to take such an alternative legal remedy, likely to be accepted by both parties, because it can enable a company to continue operating, resolve a corporate deadlock, and protect the rights of minority shareholders.