When Shareholders Deadlock: Legal Risks, Remedies, and Lessons for South African Private Companies

Introduction

You can have a profitable business, loyal clients, and ambitious growth plans — but if your shareholders are at war or your directors can’t reach consensus, your company could be in trouble.

In South Africa, private companies, especially those that are family-run, are vulnerable to shareholder and boardroom deadlocks.

These disputes often don’t arise from bad faith, but from poorly defined governance structures, informal decision-making, or the absence of a tailored MOI and comprehensive shareholders’ agreement. These documents govern the relationship between the company stakeholders and stipulate rules that govern the company respectively.

Once a deadlock sets in, critical decisions aimed at moving the company forward, stall, and operational paralysis sets in.

This article explores how and why deadlocks occur, what legal remedies are available under South African law, and what practical steps can be taken to resolve, or even better yet, prevent, these high-risk corporate standstills.

What is a Shareholder Deadlock?

A shareholder (or director) deadlock arises when those with decision-making powers are unable to achieve the required voting threshold to move the business forward. Deadlocks are particularly common in 50/50 ownership structures, or where minority shareholders are granted veto rights in the shareholders’ agreement.

Deadlocks can often emerge around significant corporate decisions, such as:

1.             appointing directors;

2.             approving financials;

3.             restructuring the company; or

4.             repurchasing shares.

When parties are entrenched in opposing positions, and no tie-breaker mechanisms exists, the business enters into a deadlock.

The consequences can be severe: operations stall, legal compliance may lapse, investor confidence is shaken, and in extreme cases, the company may face liquidation.

Common Causes of Deadlock

It is often found that deadlocks arise due to:

1.             competing shareholder factions, often following succession disputes or internal splits;

2.             incapacity or death of a key shareholder or director, disrupting the balance of decision-making power;

3.             stalemates on major resolutions, such as financial approvals or strategic direction;

4.             economic pressure, where shareholders cannot agree on restructuring, downsizing, or capital injection strategies.

Such scenarios are often exacerbated by the absence of an enforceable shareholders’ agreement or the failure to implement its provisions correctly.

When Shareholders Disagree: Legal Remedies

Where deadlock exists:

1.             non-conflicted directors may still adopt valid resolutions (if a quorum exists);

2.             dispute resolution clauses in the MOI or shareholders’ agreement — such as mediation or expert determination — can be invoked;

3.             derivative actions under section 165 of the Companies Act 71 of 2008 (“the Companies Act”) allow shareholders to bring legal action in the name of the company;

4.             urgent court applications may be launched to interdict obstruction, or compel specific performance.

However, certain major decisions, for example, amendments to the MOI, schemes of arrangement, or liquidation, require a special resolution supported by at least 75% of shareholders. In deadlocked ownership structures, this is often unattainable.

Strategic Steps to Prevent or Break a Deadlock

Deadlocks are disruptive, but they are not inevitable. Preventative and responsive measures include:

1.             proposing workaround resolutions, especially where disputed transactions can be restructured;

2.             calling urgent board meetings facilitated by neutral third parties;

3.             triggering dispute resolution clauses in the shareholders’ agreement or MOI;

4.             applying for court relief, such as declaratory orders or interdicts, where one faction is unreasonably blocking critical decisions.

Some companies also include structured mechanisms in their shareholders’ agreements, such as:

1.             casting votes by the chairperson;

2.             status quo provisions, forcing parties to maintain the current position until consensus is reached;

3.             buy-out clauses (e.g. Russian roulette or Texas shoot-out) enabling shareholders to exit the deadlock via a forced sale;

4.             sale of the entire shareholding or liquidation as a last resort.

Conclusion

Internal disputes between shareholders or directors are not uncommon, but they do not have to derail your company. South African law provides a clear framework of duties, dispute-resolution tools, and legal remedies to address deadlocks.

With the right planning, structures, and legal advice, companies can move beyond the paralysis of deadlock and return to growth and good governance.

Is your boardroom deadlocked?

Our corporate legal team can help you assess your governance framework, navigate shareholder disputes, and restore business momentum.