An equal split works while both owners agree. When they stop agreeing, a 50/50 company can stall. Here is how deadlock works under Ontario’s Business Corporations Act, and the ways out for either owner.
What is shareholder deadlock?
Deadlock means the company cannot make decisions because the votes are evenly split, usually because each owner holds half the voting shares and is one of two directors. A 50/50 shareholder vote fails unless the company’s documents give someone a tie-breaking vote, and with only two directors, one director staying away can stop the board from acting at all.
So approving financial statements, borrowing and electing new directors can all stall. A company that still makes its key decisions, however unhappily, is not deadlocked.
Where should we look first?
Start with the shareholder agreement, the articles and the by-laws. Look for:
- A deadlock clause: a casting vote, an independent director, or steps such as mediation.
- A shotgun (buy-sell) clause: one shareholder names a price, and the other must either sell at that price or buy at it. These clauses have strict terms and favour the owner who can raise money more easily. Get current financial information and a valuation before triggering or answering one.
- A mediation or arbitration clause. If the agreement sends disputes to arbitration, a court will generally require the parties to use it.
- A unanimous shareholder agreement, an agreement among all the shareholders that can restrict the directors’ powers and may itself provide a way to end the company.
Can a court wind up a deadlocked company?
Yes, in the right case. Winding up means ending the company: a court-appointed liquidator sells its property, pays its debts and distributes what is left to the shareholders. A shareholder may apply.
The Act does not list deadlock as a ground of its own. It is usually argued under section 207 of the Act, on the basis that it is just and equitable for the company to be wound up. Oppression is also a ground.
Courts are generally reluctant to wind up a viable business when a buyout or another order would fairly end the dispute, and on a winding-up application they can make other orders instead, including under the oppression remedy.
How does the oppression remedy apply?
Under section 248, a shareholder, director or officer can apply for relief where the company’s conduct is oppressive or unfairly prejudicial to, or unfairly disregards, their interests. The court asks what the applicant reasonably expected and whether unfair conduct defeated it. A good-faith disagreement may not be oppression. One owner acting alone, for example by shutting the other out or raising their own pay, may be.
The court has broad powers, both interim and final: it can restrain the conduct, appoint a receiver-manager or new directors, order one party to buy the other’s shares, order compensation, or wind the company up.
The Court of Appeal for Ontario has held that the two-year limitation period applies to oppression claims (Maurice v. Alles, 2016 ONCA 287), so do not let a deadlock drift.
How are the shares valued?
In a court-ordered buyout, the court fixes the price, usually on evidence from business valuators. Disputes often turn on the valuation date, the owners’ pay and shareholder loans. Any buyout should also deal with personal guarantees: an owner who sells generally remains liable on a guarantee of the company’s debt unless released.
What should we do while the dispute goes on?
- Agree interim terms in writing: who pays staff and suppliers, and nothing outside the ordinary course without both owners.
- Check bank signing authority. If two signatures are needed, payroll can stall. If either owner can sign alone, money can leave quickly.
- Protect records and systems. Directors are generally entitled to examine the company’s records, and shareholders have narrower access rights. Do not change passwords, remove files or lock the other owner out.
- Avoid self-help. Moving customers or funds can support an oppression claim against you. If interim terms cannot be agreed, the court can make interim orders.
Can we end it without a court order?
Often, yes, and mediation can help get there:
- A negotiated buyout, based on an independent valuation, with releases of guarantees.
- A sale to a third party, with the proceeds split.
- Voluntary winding up or dissolution. The owners can agree to wind up or dissolve the company themselves. With a 50/50 split, both must agree.
Whichever side you are on
Put proposals in writing, keep the business running normally, and get your own valuation before making or answering an offer. A fair, documented process protects you whether you end up buying, selling or in court.