Most deadlock clauses assume equal pockets

Russian roulette and Texas shoot-out both work the same way: one party names a price, and the other chooses whether to buy or sell at it. On paper the mechanism is elegant, because the party setting the price cannot set it unfairly without risking being on the wrong side of its own number.

In practice the elegance depends on an assumption that is almost never true — that both shareholders can fund a buy-out. Where one founder has liquidity and the other does not, the clause is not a deadlock mechanism at all. It is a call option granted to whichever shareholder has access to capital, exercisable at a moment of maximum stress.

How it plays out

The funded shareholder names a price low enough to be attractive as a buyer and just high enough that refusing looks unreasonable. The unfunded shareholder cannot buy at any price, and so must sell at the number chosen by the person on the other side of the table. The mechanism has functioned exactly as drafted and produced a result no one would have agreed to at the outset.

We have also seen the reverse: a shareholder who cannot fund a purchase triggers the clause anyway, in the hope of forcing a negotiation. That works only until the counterparty accepts.

What we draft instead

An independent valuation with the methodology fixed in advance — earnings basis, multiple range, treatment of surplus assets, and who appoints the valuer if the parties cannot agree. A staged payment structure so a buy-out does not require the whole sum on completion. And a right of first refusal that survives the process, so neither party can go around it.

It is slower than a shoot-out and less satisfying to draft. It also does not decide the outcome by reference to which shareholder happens to have cash available in the month the relationship fails.

The clauses that matter more

Most deadlocks never reach the deadlock clause. They are resolved — or avoided entirely — by reserved matters, board composition, and a properly drawn dividend policy. A constitution that requires unanimity on ordinary trading decisions manufactures deadlock; one that reserves only genuinely fundamental matters rarely produces it.

Where we are asked to review a shareholders’ agreement, the deadlock clause is the last thing we look at. The reserved matters schedule is the first.

A practical test

Ask which shareholder would win under the current clause if the relationship failed tomorrow. If the answer is obvious, and it is not obvious for reasons either party would defend in the abstract, the clause is not doing the job it was drafted to do.

Most deadlock clauses assume equal pockets

Russian roulette and Texas shoot-out both work by forcing one party to name a price and the other to choose a side. They are elegant on paper and brutal in practice, because they reward whoever can fund a buy-out.

For a two-founder company where one has liquidity and one does not, that clause is not a deadlock mechanism. It is an option granted to the wealthier shareholder.

What we draft instead

An independent valuation with a fixed methodology, a staged payment structure, and a right of first refusal that survives. Slower, but it does not decide the outcome by reference to who has the cash.