Deadlock mechanisms: a Russian and English law comparison | Practical Law

Deadlock mechanisms: a Russian and English law comparison | Practical Law

A table comparing and summarising the English and Russian legal positions on deadlock mechanisms commonly found in joint ventures and shareholders' agreement. This is part of a set of resources comparing English and Russian law positions on commonly used terms in international transactions.

Deadlock mechanisms: a Russian and English law comparison

Practical Law UK Practice Note 9-504-3721 (Approx. 4 pages)

Deadlock mechanisms: a Russian and English law comparison

by Ian Ivory and Anton Rogoza, Goltsblat BLP, Moscow
Law stated as at 19 Jan 2011 • England, Russian Federation, Wales
A table comparing and summarising the English and Russian legal positions on deadlock mechanisms commonly found in joint ventures and shareholders' agreement. This is part of a set of resources comparing English and Russian law positions on commonly used terms in international transactions.

Deadlock mechanisms

English law
Russian law
Deadlock mechanisms are frequently included in joint ventures and shareholders' agreements to deal with situations where there is a continuing disagreement between parties, preventing implementation of a proposed course of action. They are widely used in contracts and there are many variations. 
A deadlock usually arises where the parties cannot agree on a key strategic business decision concerning the company and one or more parties have exercised their voting rights or right of veto in a way preventing the action being taken, leading to a stalemate. The same result occurs if a party refuses to attend a shareholders' meeting where his presence is needed before the meeting can be lawfully constituted.
For further information, see Practice note Termination: joint ventures.
The principal remedy is for one party to buy out the other, although there are differing methods by which this can be achieved.
The main contractual mechanisms listed below are referred to by their commonly used names. However, these names are not formally recognised by law and the terms may depend on what the parties actually agree in the contract:
  • Irrevocable powers of attorney. These are often used to secure performance of the parties' obligations.
  • Gin and tonic. Senior management of the respective organisations in dispute will discuss the way forward. This is usually the first step in any attempt to remedy a deadlock situation.
  • Other remedies can include reference to mediation or arbitration, expert determination, the use of put and call rights to buy out one party, or even the liquidation or break-up of the company, with its assets being sold and proceeds being returned to shareholders. 
This is still a developing area. Deadlock mechanisms have not been extensively tested in the courts. In theory, some of the mechanisms should be possible to structure, although others will be more problematic. For example:
  • Where put and call options are used.
  • If irrevocable powers of attorney are required.