Shareholder Deadlock: Corporate Lawyer’s Guide To Resolving Disputes in Deadlocked Companies and ensuring effective decision-making.

Company deadlock is one of the most paralysing situations a UK business owner can face. When there are two key people (both being shareholders and directors) and they cannot agree, the entire company can grind to a halt – unable to pass resolutions, approve accounts, appoint or remove directors, or make strategic decisions. If you are wondering how to deal with company deadlock, this guide sets out everything you need to know, from the legal definition through to the practical remedies available under UK law.

As a specialist corporate solicitor who has advised on numerous corporate restructurings, I have seen first-hand how quickly deadlock can escalate from a management disagreement into a full-blown crisis that threatens the survival of a business. The good news is that there are effective legal mechanisms to resolve the situation.

If you are currently experiencing a deadlock scenario and need urgent legal support to protect your business, you can seek help from a third party. Speak with our corporate law team for practical, fixed-fee advice.

Chapter 1: What Is Company Deadlock?

Defining Deadlock in UK Company Law

Company deadlock usually arises when there are two key decision makers who are both directors and shareholders of the company, and cannot reach agreement. Usually, the company would have the model articles of association and no shareholders’ agreement that solves the deadlock, and one of the parties is refusing to attend board meetings or general meetings of the shareholders.

In practical terms, deadlock means that the company is paralysed. No ordinary resolutions, no special resolutions, and no board decisions can be validly passed usually because there aren’t enough people present at the relevant meeting to form a “quorum,” leading to a potential deadlock. In short, a quorum is the minimum number of directors (for a board meeting) or shareholders (for a general meeting) required to be present at the relevant meeting for any decisions to be made. The classic scenario is a 50/50 company – two shareholders each holding an equal number of shares, each serving as a director, and each possessing the power to block any decision proposed by the other.

Why Deadlock Is An Issue

Deadlock is not merely inconvenient; it can be existential. A deadlocked company cannot approve annual accounts, declare dividends, appoint or remove auditors, authorise new share allotments, or comply with its statutory filing obligations at Companies House. Over time, the company risks regulatory penalties, loss of commercial relationships, employee departures, and ultimately insolvency – not because the business itself is unprofitable, but because its governance has seized up.

The courts have repeatedly recognised deadlock as a ground for court intervention in business disputes. In the landmark case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, the House of Lords acknowledged that where a company operates as a “quasi-partnership” and the relationship of mutual trust and confidence between its members has irretrievably broken down, it may be just and equitable to wind the company up. More recently, in Dosanjh v Balendran, the court granted a winding-up order where functional deadlock had rendered the company unable to operate.

Common Causes of Company Deadlock

In my experience advising UK SMEs, deadlock typically arises from one or more of the following triggers: fundamental disagreements over business strategy or direction, a breakdown in the personal relationship between co-owners, disputes about the distribution of profits or directors’ remuneration, allegations of mismanagement or breach of fiduciary duties, or a failure to agree on the appointment or removal of key personnel. These disputes are often compounded by the absence of a properly drafted shareholders’ agreement containing deadlock resolution provisions. For more on the importance of this foundational document, see our guide on understanding shareholders’ agreements.

Board-Level Deadlock vs Shareholder-Level Deadlock

It is important to distinguish between deadlock at the board of directors and deadlock at the shareholder level, as the implications and available remedies differ.

Board-level deadlock usually occurs when either

(a) there are two directors and these are in disagreement, potentially leading to deadlock, or

(b) one of them is not willing to attend board meetings (assuming the company’s articles of association require the usual minimum of two directors to be present to form a quorum).

The former can sometimes be resolved by the chairman’s casting vote (if the articles of association provide for one).

The latter cannot be resolved unless the articles of association are amended or another director is appointed, but both of these actions require board approval. Board approval cannot be secured if the directors don’t agree, or if one of the directors is not attending board meetings (creating a catch 22-like situation).

Shareholder-level deadlock is similar, and that’s where either

(a) the shareholders are evenly split and the articles or shareholders’ agreement do not provide a mechanism for decision-making to break the impasse, or

(b) one of the shareholders is not attending the shareholder meetings and therefore there aren’t enough shareholders present to pass a decision. This is an issue because, as per above, there won’t be a quorum, which is contrary to the requirements set out in s.318(2) of the Companies Act 2006. These state that a minimum of two shareholders must be present at a meeting of the shareholders if the company has more than one shareholder.

Chapter 2: Digging Deeper into Quorum Requirements

What the Law Actually Says

As mentioned above, “quorum” simply means the minimum number of people who need to be present at a meeting before any decisions can validly be taken. If a meeting is “inquorate” (i.e. does not meet the quorum), then anything decided at that meeting is void. It is as though the meeting never happened.

Under s.318 of the Companies Act 2006, the default quorum for a general meeting of shareholders is two “qualifying persons”. A qualifying person is a shareholder present in person, a corporate representative authorised under s.323, or a proxy appointed by a shareholder. For a single-member company, the quorum is just one qualifying person.

Companies are free to set a higher quorum in their articles, but they cannot go below the statutory minimum. Most private companies simply adopt the articles to include provisions for resolving deadlock. Under the Model Articles, the quorum for general meetings is two qualifying persons (see article 38, which implies reference to s.318 of the Companies Act), and the quorum for board meetings is two directors (see article 11).

Why This Matters in a Deadlock

Here is the problem. In a typical 50/50 company with two shareholders and two directors, the quorum requirement means that both people need to show up for any meeting to be valid. If one of them decides not to attend – whether out of spite, frustration, or as a deliberate tactic – no meeting can proceed. No decisions can be made. The company is stuck.

This creates a particularly frustrating dynamic. One party can effectively hold the entire company to ransom by simply refusing to participate. The articles may provide that if a quorum is not present within a specified time (commonly 15 or 30 minutes), the meeting is adjourned. Some articles go further and say that at the adjourned meeting, those present shall constitute a quorum – but this is not universal, and it depends entirely on the specific articles the company has adopted. The Model Articles, for example, provide for adjournment but do not reduce the quorum at the adjourned meeting.

Quorum and Deadlock: A Practical Comparison

The table below sets out some common deadlock scenarios and shows how quorum requirements interact with the share structure to create different levels of risk, especially when a deadlock occurs.

 The key takeaway from this table is that equal shareholdings combined with a two-person quorum requirement create the highest risk of total paralysis. If you are in a 50/50 company, understanding the relationship between your share structure and your quorum rules is essential. For a deeper look at how shareholders’ agreements interact with articles of association to govern these matters, see our detailed comparison of shareholder agreements vs articles of association.

The Court’s Power to Order a Meeting

There is one statutory safety valve worth knowing about. Under s.306 of the Companies Act 2006, if it is impracticable to call or conduct a meeting in the normal way, any director or shareholder who would be entitled to vote can apply to the court for an order directing that a meeting be held. The court can give whatever directions it thinks fit, including a direction that one member present at the meeting shall be deemed to constitute a quorum.

This is a powerful tool. It means that if one shareholder is boycotting meetings to prevent decisions being made, the other shareholder can ask the court to allow the meeting to proceed without them. However, obtaining such an order requires a court application, which involves time and cost, and the court will want to be satisfied that a meeting genuinely cannot be held in the usual way before it intervenes.

Chapter 3: How to Deal with Company Deadlock

So, what do you actually do if your company is deadlocked? The answer depends on the circumstances – the nature of the dispute, the value of the underlying business, whether there is a shareholders’ agreement in place, and how willing (or unwilling) the other side is to engage. Below, I have set out the main options, broadly in order from least aggressive to most aggressive.

1. Rely on Deadlock Resolution Clauses or Articles in Your Shareholders’ Agreement or Articles of Association

The single most effective safeguard against deadlock is a well-drafted shareholders’ agreement or bespoke articles of association that anticipate the problem and provide a contractual mechanism to resolve it. If your company has one, this is the first place to look. Common deadlock resolution provisions include:

•       Mediation and arbitration clauses – mandating that the parties engage in alternative dispute resolution before commencing litigation.

•       Russian roulette (or “shootout”) clauses – allowing one party to make an offer to buy the other’s shares at a stated price to prevent a potential deadlock. If the offer is declined, the offeror must sell their own shares to the other party at that same price to resolve the deadlock. This focuses minds quite quickly.

•       Texas shootout clauses – requiring both parties to submit sealed bids for the other’s shares, with the highest bidder acquiring the other’s interest.

•       Drag-along and tag-along rights – enabling a sale of the entire company where one party wishes to exit and the other does not.

•       Chairman’s casting vote – giving one party the ability to break a tied vote on specific categories of decision.

If your company does not yet have a shareholders’ agreement or bespoke articles, or if your existing agreement does not address deadlock, I would strongly recommend putting one in place as soon as possible.

2. Negotiate a Share Buy-Out

Where the relationship between shareholders has broken down but the underlying business is still viable, a negotiated share buy-out is often the most sensible outcome. One party acquires the other’s shares, allowing the company to continue trading under single ownership.

The main challenge here is agreeing on a fair price. Valuation disputes are extremely common in deadlock situations – each side has a different view of what the business is worth, and there may be disagreements about whether a minority discount should apply. The most effective way to overcome this is to jointly instruct an independent valuation expert to determine the fair value of the shares.

On the funding side, the purchasing shareholder may need to arrange finance through personal resources, bank lending, or (subject to the rules on financial assistance in Part 18 of the Companies Act 2006) the company itself.

3. Mediation

Mediation is a voluntary, confidential process in which an independent mediator helps the parties reach a negotiated settlement. It is significantly cheaper and faster than going to court, and it keeps the dispute private – which is often a major concern for business owners who do not want their internal disagreements to become public knowledge.

The courts actively encourage mediation. Under the Civil Procedure Rules, parties who unreasonably refuse to mediate may be penalised in costs, even if they ultimately win at trial. In shareholder disputes specifically, mediation can be particularly effective because it allows the parties to explore creative solutions – such as restructurings, phased buy-outs, or changes to the management structure – that a court would not have the jurisdiction to order.

4. Appoint an Independent Director or Expert

In some cases, the parties can agree (or the court can direct) the appointment of an independent non-executive director to break the deadlock. This individual would sit on the board level and provide a casting vote on contested decisions, allowing the company to keep functioning while the underlying dispute is worked through.

This approach works best where the business is valuable, the dispute is limited to specific strategic questions, and both parties genuinely want the company to be wound up as a going concern. It requires a degree of co-operation between the parties, which may not always be forthcoming, but where it can be achieved it is a pragmatic and cost-effective solution.

5. Apply to the Court Under Section 306

As discussed in Chapter 2, where a deadlock is preventing meetings from being convened at all, any director or shareholder who would be entitled to vote can apply to the court under s.306 of the Companies Act 2006 for an order directing that a meeting be called and conducted in whatever manner the court sees fit. The court can direct that one member present shall constitute a quorum.

This remedy is procedural rather than substantive. It allows decisions to be taken, but it does not resolve the underlying dispute between the parties. Think of it as a way to unblock the immediate paralysis so that the company can function while the bigger issues are dealt with through one of the other routes described above.

6. Petition for Unfair Prejudice Under Section 994 of the Companies Act 2006

If consensual solutions have failed, a shareholder may bring a petition under s.994 of the Companies Act 2006 on the ground that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of its members. This is the most commonly used statutory remedy for shareholder disputes in the UK, and deadlock is a well-recognised basis for bringing such a petition.

If the petition succeeds, the court has a broad discretion under s.996 to make “such order as it thinks fit”. Unfair prejudice proceedings can be lengthy and expensive. The courts have repeatedly emphasised the importance of active case management and encourage parties to settle at every stage. But as a remedy, it is powerful and flexible.

7. Just and Equitable Winding Up

This is the nuclear option, and it should be treated as a remedy of last resort. Under s.122(1)(g) of the Insolvency Act 1986, a shareholder can petition the court to wind up the company on the ground that it is “just and equitable” to do so. This remedy is available where there has been a complete breakdown in the relationship of mutual trust and confidence between the shareholders, or where there is a functional deadlock that renders the company unable to operate.

Before making a winding-up order, the court will consider several things: the extent of the breakdown, whether the petitioner comes with “clean hands” (meaning they are not primarily responsible for causing the deadlock), whether there is a tangible benefit to be gained from winding up (usually a surplus of assets over liabilities so that shareholders will actually receive something), and – critically – whether some other remedy is available. Under s.125(2) of the Insolvency Act 1986, the court shall not make a winding-up order if some other remedy is available and the petitioner is acting unreasonably in seeking a winding up instead of pursuing that alternative.

Winding up means the company is dissolved. A liquidator is appointed, the company’s assets are sold, creditors are paid, and any surplus is distributed to shareholders. The business ceases to exist. For this reason, the courts treat it as an exceptional remedy and will always prefer a less destructive solution where one is available.

Choosing the Right Approach

There is no one-size-fits-all solution to company deadlock. The right approach depends on the specific facts – the value of the business, the strength of each party’s legal position, the existence or absence of a shareholders’ agreement or bespoke articles of association, and the commercial objectives of both sides. In every case, I would recommend seeking specialist legal advice at the earliest opportunity to assist in resolving a deadlock. Early intervention significantly increases the chances of reaching a consensual resolution and reduces the risk of protracted litigation that damages the business.

If you are facing a deadlock situation and need practical legal guidance, our team may be able to help you assess your position, understand your options, and take decisive action to protect your interests and your business.