Deadlock is one of the most disruptive situations that can arise in a private company. When shareholders cannot reach agreement on a reserved matter — a decision that requires unanimous consent or a supermajority — that decision simply cannot be taken. The rest of the business may carry on, but if the blocked decision is an important one, such as a budget, a key appointment or new funding, the company can stall.
Without a contractual mechanism to break the deadlock, the shareholders still have options: negotiation, agreeing at that stage to mediate or arbitrate, asking a court for relief under the Companies Act 71 of 2008 or, as a last resort, winding-up. None of these is quick, cheap or certain, and there is no general right to force the other shareholder to buy your shares. A well-drafted shareholders agreement anticipates this risk and provides a step-by-step resolution framework — from informal escalation through to a binding buy-sell mechanism that forces a resolution. This guide explains each mechanism, how they operate in South African practice, and how to choose the right approach for your structure.
What is a Deadlock?
A deadlock arises when shareholders are unable to pass a resolution on a matter that requires their approval, because the required level of consent cannot be achieved. This is distinct from ordinary disagreement — it is a structural inability to act.
Definition
A deadlock is the inability to pass a resolution on a reserved matter due to equal voting power or because a supermajority threshold cannot be met. In most shareholders agreements, certain decisions — such as appointing or removing directors, approving the annual budget, taking on material debt, or entering into significant contracts — are designated as "reserved matters" requiring unanimous or supermajority shareholder approval. If shareholders are equally divided, no resolution can be passed.
Consequences Without a Mechanism
Without a contractual deadlock-resolution mechanism, the consequences can be serious:
- —Stalled decisions: the blocked matter cannot be decided. One failed vote does not stop the whole business, but if the matter is important the company can drift while the shareholders argue.
- —Board gridlock: if each shareholder has appointed equal numbers of directors, board resolutions are equally unpassable.
- —Urgent court applications: the aggrieved shareholder may seek urgent relief from the High Court, which is expensive, time-consuming, and produces an uncertain outcome. SA courts are generally reluctant to intervene in commercial disputes between shareholders and will not substitute their judgment for that of the shareholders on business decisions.
Why 50/50 Companies Are Most Vulnerable
Equal-shareholding companies face structural deadlock risk by design. With two shareholders each holding 50%, any reserved matter requiring more than a simple majority — or unanimous consent — cannot be passed if one shareholder votes against it.
The Structural Problem
The Companies Act 71 of 2008 provides that an ordinary resolution needs more than 50% of the voting rights exercised on it — meaning that in a 50/50 company with two shareholders, one shareholder voting against a resolution defeats it. This is the default position, and shareholders agreements frequently make it worse by extending the list of matters requiring unanimous consent.
Common scenarios where 50/50 deadlock arises include: appointment or removal of the CEO or other key executives; approval of the annual business plan or budget; entering into a material contract (above a threshold value); taking on bank debt or providing security; issuing new shares or admitting a new shareholder; and disposing of a material asset. Each of these is a decision where the two shareholders may have genuinely different views — particularly when the relationship between them has deteriorated.
CEO Appointment
The two shareholders cannot agree on who should lead the business day-to-day. Neither can force the appointment through without the other's consent.
Major Contract
One shareholder wants to take on a large contract; the other believes the business lacks the capacity. The company cannot commit or decline.
Bank Debt
One shareholder wants to take on a loan to fund expansion; the other is risk-averse and refuses. Without a mechanism, the business is stuck.
Escalation Procedure (Step 1)
The first step in a well-structured deadlock resolution process is escalation — requiring the parties to engage directly at a senior level before invoking any formal mechanism. This recognises that most deadlocks arise from miscommunication, differing priorities, or incomplete information rather than genuine irreconcilable conflict.
Written Notice of Deadlock
Either shareholder may trigger the escalation process by delivering a formal written notice to the other, stating that a deadlock exists on a specified reserved matter. The notice should identify the matter in dispute, the resolution that cannot be passed, and the date on which the deadlock arose.
Cooling-Off Period
On receipt of the notice, a cooling-off period of 7 to 14 days typically begins. During this time the parties agree not to start ordinary legal proceedings or call further votes on the deadlocked matter. The purpose is to allow emotions to settle and to create space for rational commercial discussion. The clause should still allow urgent court relief, and a cooling-off period does not pause statutory deadlines or prescription.
Good Faith Negotiation
The senior representatives or founders of each shareholder must meet — in person or virtually — and attempt in good faith to resolve the deadlock. This is not a formality: SA courts have given content to good faith obligations in commercial contracts and a party that refuses to engage meaningfully risks being found in breach of the SHA.
Resolution or Escalation
If the parties reach agreement, the resolution is documented and the reserved matter is voted on. If the cooling-off period expires without resolution, the SHA requires the parties to proceed to the next step — typically mediation. This automatic escalation prevents either party from simply refusing to engage and holding the business hostage indefinitely.
In our experience, many deadlocks resolve at the escalation stage. The formality of a written notice and a structured meeting often prompts the parties to engage more seriously than they would in informal discussions. Where the deadlock is genuinely commercial rather than personal, the cooling-off and escalation process provides sufficient structure for a pragmatic resolution.
Mediation (Step 2)
If escalation fails, the SHA should require the parties to submit the deadlock to mediation before invoking a binding buy-sell mechanism. Mediation is a structured, confidential, non-binding process facilitated by a neutral third party.
How Mediation Works
Either party may request mediation in writing after the escalation period expires without resolution. The SHA should specify the appointing body — typically the Arbitration Foundation of Southern Africa (AFSA) or an agreed mediator. If the parties cannot agree on a mediator within five business days, AFSA (or another nominated body) appoints one.
The mediator facilitates discussions between the parties but has no power to impose a decision. The process is normally confidential and without prejudice, so what is said in mediation generally cannot be used in later litigation or arbitration. There are exceptions — for example, proving that a settlement was reached, or a disclosure that the law requires — so the SHA or the mediation rules should set out the confidentiality terms.
Timeframe and Outcome
Mediation should be completed within 30 days of the mediator's appointment, unless the parties agree to an extension. This timeframe prevents the process from being used as a delaying tactic.
If mediation resolves the deadlock, the settlement is recorded in a written agreement signed by both parties, which becomes binding under the SHA. If mediation fails — or if either party refuses to participate — the SHA should automatically trigger the binding buy-sell mechanism the shareholders have chosen (for example a Russian roulette or a Texas shootout).
Texas Shootout (Forced Buy-Sell)
The Texas shootout — also called a "sealed-bid auction" or "forced buy-sell" — is a well-known contractual deadlock-resolution mechanism in South African shareholders agreements. In its classic form it is a sealed-bid auction: each shareholder submits a confidential bid, and the highest bidder buys out the other at its own bid price. Because neither party knows what the other will bid, each has a reason to bid seriously — but, as explained below, the process does not guarantee a fair price.
A note on labels: "Texas shootout" and "Russian roulette" are used loosely in the market and are often confused with one another, so the SHA must describe the exact mechanic rather than relying on the name as shorthand.
Triggering the Mechanism
Either shareholder may trigger the Texas shootout by delivering a written notice to the other that a qualifying deadlock exists and that the sealed-bid process is to run. The notice sets the process in motion; it does not itself name a price. From that point, each shareholder is required to prepare and submit a sealed bid within the agreed window.
Sealed Bids
Within 30 days, each shareholder submits a sealed bid — a confidential offer of a price per share at which it is willing to buy out the other — to an independent escrow agent or attorney. Neither party knows what the other has bid. On the appointed date the bids are opened together, and the shareholder who submitted the higher bid is obliged to buy the other's shares at that higher bid price.
The Pricing Incentive
The sealed-bid auction creates a useful pricing incentive. A shareholder who bids too low risks being bought out cheaply, while a shareholder who bids too high wins the auction but overpays. That pushes both towards a realistic number. It does not force anyone to bid true value, though. The winner pays its own bid, so a bidder may shade its bid downwards, and a shareholder with better information, more cash or easier access to credit has a real advantage. The clause should deal with those imbalances — for example, through equal access to financial information and proof of funding — rather than assume the auction polices itself.
Completion of the Transaction
Once the bids are opened and the buyer is determined, the transaction must be completed within a fixed period — typically 30 to 60 days; our standard draft uses 30 days, extended where bank finance is needed. The SHA should specify the mechanics of completion — execution of a share transfer agreement, delivery of share certificates or electronic transfer, payment of the purchase price, and resignation of any directors appointed by the exiting shareholder. If the company itself is to buy the shares, or to help fund the purchase, the Companies Act applies as well: a company buy-back must meet the solvency and liquidity test and the other requirements of sections 46 and 48 (generally including a special resolution of shareholders), and financial assistance by the company to a buying shareholder may need approval under section 44 or 45.
Safeguards
A well-drafted Texas shootout clause includes safeguards: a financing period (allowing the winning bidder to arrange financing before completion), a solvency condition (the transaction does not complete if it would render the company insolvent), and a mechanism for what happens if the winning bidder defaults on payment (typically the other party becomes entitled to purchase at that party's own bid price or to claim damages).
Practical note: The main risk in a Texas shootout is financing. The shareholder who wins the auction may be unable to raise sufficient funds within the completion period (typically 30 to 60 days; our standard draft uses 30 days, extended where bank finance is needed). The SHA should address this expressly — either by requiring bidders to have financing in place before bids are opened, by extending the completion period where financing is genuinely in progress, or by allowing the other party to acquire the shares at its own bid price if the winning bidder defaults.
Russian Roulette
The Russian roulette clause turns on a single price. One shareholder serves a notice naming one price per share; the other shareholder then elects either to buy the offeror’s shares at that price or to sell its own shares to the offeror at the same price. There is no auction and no round of competing bids — just one price and the counterparty’s choice of which side of the trade to take.
How It Differs from a Texas Shootout
In a Texas shootout, both shareholders submit sealed competing bids and the highest bidder buys the other out at its bid price — the price is set by an auction. In a Russian roulette, only one price is ever named: the offeror states a single price, and the responding shareholder decides whether that price buys the offeror out or buys the responder out. The offeror commits to the price without knowing which side of the deal it will end up on.
This gives the offeror a strong reason to name a fair price, because it cannot control whether it becomes buyer or seller. It does not guarantee one: an offeror who knows that the other shareholder cannot raise the money to buy can name a low price with little risk. It also exposes the offeror to significant risk — if it names a price expecting to buy, the other party may instead elect to sell to it at a price the offeror has not adequately financed.
Use in South African Practice
A Russian roulette clause is the usual choice between shareholders of comparable financial means, because each side can realistically end up as the buyer, which keeps the named price honest. Our standard draft uses a Russian roulette clause between shareholders of comparable means. Where one shareholder has much deeper pockets than the other, a sealed-bid (Texas shootout) process or an independent valuation is usually preferred. The clause can feel aggressive, so it should come only after escalation and mediation have failed. Which mechanism suits a particular company depends on the shareholders' relative funding and information, not on the label.
Shotgun Clause
The shotgun clause is a variation on the forced buy-sell mechanisms. As the label is usually used, a shotgun clause lets any shareholder trigger a compulsory buy-out at any time — not only upon deadlock — by naming a price. The other shareholder must accept the price: they must either buy or sell at that price and have no other options.
When a Shotgun Clause is Used
A Texas shootout or Russian roulette is usually drafted to apply only upon a specified deadlock, whereas a shotgun clause is usually drafted so that it can be invoked at will. None of these labels comes from legislation: whether a mechanism can be used at will, only on deadlock or after some other trigger depends on what the agreement actually says. An at-will trigger makes the shotgun a powerful provision but also a potentially destabilising one: a well-capitalised shareholder can trigger it at any time, confident that the other shareholder (who may lack liquidity) will be forced to sell.
For this reason, shotgun clauses are best suited to structures where both shareholders have similar financial resources and neither has a significant liquidity advantage over the other. Where there is a material financial imbalance between shareholders, a shotgun clause can be weaponised and should be used with care — or avoided in favour of a deadlock-triggered Texas shootout or an independent valuation.
Valuation-Based Mechanisms
Some shareholders agreements opt for a valuation-based approach to deadlock resolution rather than an adversarial bidding mechanism. Under this approach, an independent expert is appointed to determine the fair value of the shares, and the exiting shareholder's interest is bought out at that value.
Appointment of Independent Valuer
The SHA specifies who may appoint the valuer — typically an agreed accounting firm, or the President of the South African Institute of Chartered Accountants (SAICA) or another professional body if the parties cannot agree. The valuer acts as an expert, not an arbitrator: their determination is final and binding on both parties (subject to manifest error).
Valuation Methodology
The SHA should specify the valuation basis — whether on a going concern basis, an earnings multiple, a net asset value basis, or another methodology appropriate to the company's business. Without a specified methodology, the valuer has broad discretion, which can produce unpredictable outcomes. Agreeing the methodology upfront reduces the scope for dispute about the valuation process.
Buy-Out at Valuation Price
Once the valuation is determined, the SHA must specify which shareholder buys and which sells. This is typically resolved either by agreement between the parties once the valuation is known, or by a predetermined rule — for example, the shareholder who triggered the deadlock process may be required to sell, or the parties may bid for the right to buy once the valuation price is set.
Advantages and Disadvantages
A valuation-based mechanism produces a fair price determined by an independent expert rather than by the strategic positioning of the parties. This is particularly appropriate for long-term business partners who want a commercially sensible exit rather than an adversarial auction. However, the process is slower than a Texas shootout (valuations can take 30–60 days) and more expensive, since professional valuation fees are material. It also does not resolve the question of which party exits — only what price is paid.
Winding Up as Last Resort
Where no contractual mechanism resolves the deadlock, a shareholder may be able to apply to the High Court to wind up the solvent company under section 81(1)(d) of the Companies Act 71 of 2008. This is the last resort. A court will not grant it merely because the shareholders are in dispute, and it can destroy a great deal of value, so it should only be considered where the relationship has broken down irretrievably and no other solution is available.
Legal Basis
Section 81(1)(d) of the Companies Act gives a shareholder three possible routes, each with its own requirements. First, director deadlock: the directors are deadlocked in managing the company, the shareholders are unable to break that deadlock, and either the company is suffering or may suffer irreparable injury, or its business cannot be conducted to the advantage of shareholders generally. Disagreement on its own is not enough. Second, shareholder deadlock: the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired. Third, it is otherwise just and equitable for the company to be wound up. There is also a standing requirement in section 81(2): as a general rule the applicant must have been a shareholder for at least six months before applying, with limited exceptions. South African courts have confirmed that shareholder deadlock — where the relationship of mutual trust and confidence between shareholders has broken down and the company can no longer function — can constitute just and equitable grounds for winding up: Moosa NO v Mavjee Bhawan (Pty) Ltd 1967 (3) SA 131 (T) is the leading authority for the proposition that deadlock and breakdown of the underlying substratum of a quasi-partnership justifies a just and equitable winding up.
The Court's Approach
The court does not grant winding-up orders lightly. It will consider the applicant's own conduct and how the deadlock arose (an applicant does not have to be blameless, but conduct matters); whether there are alternative remedies available; whether the winding up would be prejudicial to creditors or other stakeholders; and whether another remedy would be more proportionate. A court will not order a buy-out simply because liquidation was asked for. A buy-out order needs its own legal basis — for example, a properly founded application under section 163 of the Companies Act (relief from oppressive or unfairly prejudicial conduct), which has its own requirements.
Why It Should Be Avoided
A winding up usually realises less value for shareholders than a going-concern sale. Liquidators' fees, legal costs, and the disruption of the liquidation process erode value. Jobs, customer relationships and goodwill are all put at risk, although a liquidator can sometimes still sell the business as a going concern. For a company that has genuine going-concern value, winding up is usually the worst outcome for both shareholders — which is precisely why having a contractual deadlock mechanism in place matters.
Which Mechanism to Use?
The right deadlock mechanism depends on the nature of the business, the financial resources of the shareholders, and the relationship between the parties. The comparison below summarises the key features of each approach.
| Mechanism | Best For | Risk | Complexity |
|---|---|---|---|
| Escalation / mediation | Any deadlock | None (non-binding) | Low |
| Texas shootout | Shareholders of unequal financial means | Financing risk | Medium |
| Russian roulette | Shareholders of comparable financial means | Aggressive; unfair if one side cannot fund a purchase | Medium |
| Independent valuation | Long-term partners; unequal financial means | Time-consuming | Medium–High |
| Winding up | Last resort only | Can destroy value | Very High |
For many South African private companies, we recommend a cascading mechanism: escalation to the founders (7–14 days), followed by mediation (30 days), followed by a binding buy-sell mechanism. Which buy-sell mechanism is right depends on the shareholders' relative financial means: a Russian roulette clause is the usual choice between shareholders of comparable means (and is what our standard draft uses in that case), while a sealed-bid Texas shootout or an independent valuation is preferred where means are unequal. This staged approach provides multiple opportunities for a commercial resolution while making sure that a binding contractual outcome is available if the parties cannot agree.
Drafting Tips
A deadlock clause that is poorly drafted is nearly as bad as no deadlock clause at all. Ambiguity about what constitutes a deadlock, who can trigger the mechanism, and what the consequences of non-compliance are will result in the same expensive litigation the clause was meant to avoid.
Define "Deadlock" Precisely
The SHA must specify exactly what constitutes a deadlock. Does it require a formal vote to fail? How many times must the vote fail before the deadlock mechanism is triggered? Is a deadlock only triggered on reserved matters, or also on board decisions? Ambiguity here is a source of litigation. The definition should be specific: "a resolution on a reserved matter that has been proposed at a duly convened shareholders meeting and has failed to achieve the required level of approval on two consecutive occasions, with the second meeting held not less than [10] business days after the first."
Specify Escalation Timeframes
Every step of the deadlock process must have a defined timeframe: days for written notice, days for cooling off, days for escalation meeting, days for mediation, days for election, days for completion. Open-ended timeframes allow a party acting in bad faith to delay indefinitely. Hard deadlines with automatic escalation prevent this.
Include a Financing Period
Where the mechanism is a Texas shootout, the SHA must address financing. Allow the electing buyer a reasonable period — typically 30 days — to arrange financing before the transaction completes. Specify what happens if the buyer cannot finance: does the seller become entitled to buy at a reduced price? Does the triggering shareholder retain their shares? Does the non-triggering shareholder become entitled to buy at a discount? Each outcome must be expressly addressed.
Address Default by the Buyer
If the elected buyer fails to complete the transaction, the SHA needs a clear consequence. The most commercially sensible outcome is typically that the other party (the defaulting party's counterparty) becomes entitled to acquire the defaulting buyer's shares at the same price, on the same terms, with a short additional completion period. This prevents the mechanism from being gamed by an elected buyer who simply refuses to complete.
Limit to Truly Material Matters
Consider whether the Texas shootout should be triggered by any deadlock on any reserved matter, or only by deadlocks on genuinely material matters. Triggering a forced buy-sell over a minor disagreement on a budget line item is commercially disproportionate. Limiting the mechanism to deadlocks on core matters — appointment or removal of the CEO, approval of the business plan, taking on debt above a material threshold — preserves the mechanism for when it is truly needed and prevents it from being weaponised over trivial disputes.
50/50 Structures — Are They Always a Bad Idea?
The instinctive reaction of many corporate lawyers to a 50/50 shareholding structure is that it is inherently problematic and should be avoided. This view is overstated. Whether a 50/50 structure is appropriate depends entirely on the specific circumstances.
When 50/50 Works Well
Equal shareholding can work very well where the founders have genuinely aligned interests, complementary skills, and a shared vision for the business. Many highly successful South African businesses have been built on 50/50 partnerships. The structure reflects equal contribution and equal stake, which can be commercially appropriate and personally important to the founders.
The key is that the SHA must be comprehensive enough to deal with the structural risk. A 50/50 company with a well-drafted SHA — including a clear deadlock mechanism — is often more robust than a majority-controlled company with no SHA at all.
When to Reconsider
A 50/50 structure should be reconsidered — or approached with particular care — where: one shareholder has meaningfully greater financial resources than the other (creating an asymmetric Texas shootout risk); the shareholders have significantly different risk appetites or time horizons; the company is in a fast-moving industry where decisions need to be made quickly and consensus is difficult to achieve; or the personal relationship between the shareholders is already under strain.
In these situations, a 51/49 structure — with appropriate minority protections built into the SHA — may be a more workable arrangement than a 50/50 split.
The Bottom Line
The Companies Act 71 of 2008 does not give private companies a simple, built-in way to break a deadlock. Shareholders who have not dealt with deadlock in their shareholders agreement are not without remedies: they can still negotiate, agree to mediate or arbitrate, or ask a court for relief under section 163 or, in the last resort, a winding-up under section 81. But those routes are slower, costlier and less predictable, each has its own requirements, and there is no general right to make the other shareholder buy your shares. Planning for deadlock is therefore best done by the parties and their attorneys at the time the business is structured. A few additional pages in a shareholders agreement usually cost far less than later litigation, and are a worthwhile investment for equal-shareholding business partners.
Need a Deadlock Mechanism in Your Shareholders Agreement?
MJ Kotze Inc drafts and reviews shareholders agreements for private companies across South Africa. We structure deadlock provisions that are practical, enforceable, and commercially appropriate for your specific structure.