Business Protection: Corporate Disputes and Ways Out of Deadlocks

Corporate Conflicts: Typology

Internal corporate conflicts are one of the main threats to business. Partners who started a business together often diverge in their vision for development, profit distribution, or strategy.

Deadlock — a situation where parties with an equal number of votes cannot make a decision. For example, two partners with 50/50 ownership cannot agree on a strategy.

Minority Oppression — actions by a majority shareholder that infringe upon the rights of a minority shareholder: non-payment of dividends, transferring profits to affiliated entities, denial of access to information.

Abuse of Corporate Rights — using veto rights or a blocking stake to blackmail other participants.

Mechanisms for Preventing Conflicts

Shareholders' Agreement — a key tool. It should include:

• The procedure for making decisions (what requires unanimity, what requires a simple majority)
• A mechanism for resolving deadlock (negotiations, mediation, arbitration, forced sale)
• Restrictions on share alienation (lock-up period, right of first refusal — ROFR)
• Tag-along (the right of a minority shareholder to sell a stake on the same terms as the majority shareholder)
• Drag-along (the right of the majority shareholder to "drag along" the minority in a sale)
• Dividend policy

Mechanisms for Deadlock Resolution

Russian Roulette — one partner names a price, and the other can either buy his stake at that price or sell his own stake at the same price. A tough mechanism but effective: it incentivizes naming a fair price.

Texas Shootout — both partners make sealed bids to buy the other's stake; the winner is the one who offers more.

Compulsory Liquidation — a last resort in the event of a complete deadlock: the company is liquidated and assets are divided.

Corporate Disputes in Court

In Russia, corporate disputes are considered by arbitration courts (commercial courts) at the location of the company. Typical lawsuits: recognizing a transaction as invalid, excluding a member from an LLC (in the case of gross violation of duties or impossibility of joint management), recovery of damages from the director.

Exclusion of a Member from an LLC — a radical measure: the court may exclude a member whose actions have harmed the company or make its operations impossible. The excluded member receives the actual value of their share.

Practical Assignment

You and your partner each own 50% of a manufacturing company. The partner wants to sell the entire business to a strategic investor for 100 million rubles, while you believe the company is undervalued and oppose the sale. Which protection mechanisms could you use if they were stipulated in the shareholders' agreement? What will you do if there is no agreement?