When parties start a new venture they are filled with ambition and optimism. They make grand plans to expand and conquer the business world. However, before long they start making plans on how to escape the nightmare that is their business partner.
A prudent party can avoid this situation by inserting a deadlock provision into the agreement. Deadlock provisions, or early exit provisions are becoming popular as it provides a quick and clean mechanism for escaping an agreement.
While contractual clauses make provision for the termination of the agreement in case of default. Few clauses allow a party to walk away from the agreement unscathed. Deadlock provisions do just that. Deadlock provisions like the Texan Shoot-Out and the Dutch Auction allow parties to escape agreements in circumstances where parties no longer wish to perpetuate the relationship or where they cannot reach consensus on a matter.
Deadlock provisions are, as the name suggests, inserted to prevent deadlocks. However they also function to enable a party to unilaterally terminate the agreement. Depending on the wording of the particular deadlock provision, one or both parties may have the right to activate the deadlock provision on the occurrence of some specified event.
An example of this type of specified event would be when the parties cannot agree on a particular matter or when one of the parties notifies the other party of its intention to invoke the deadlock provision.
These provisions can be included in shareholders agreements, partnership agreements, joint venture agreements, or any other agreement where the parties have an equal interest or an equal number of voting rights.
There are usually various steps prior to invoking the deadlock provision. Parties can be obliged to summarize their differences in writing, mediate and/or negotiate. However, failing that the deadlock provision will operate.
There are various types of deadlock provisions. However this article will focus the Texan Shoot-Out and the Dutch Auction.
A Texan Shoot-Out clause envisages that the triggering party will send a sealed bid to the target party. This bid will contain an offer to sell the triggering party’s share of the business for a specified amount. If the target party accepts the offer he must purchase the triggering party’s share of the business at the specified amount. However, if the target party refuses the offer, he must sell his share of the business to the triggering party, at the price proposed by the triggering party.
With a Dutch Auction, the parties meet and submit their sealed bids. The sealed bids can be given to each other or to an independent third party.
The bids state the amount of money which each party would be willing to sell their share of the business for. The party who has submitted the highest bid wins the Dutch Auction. His prize is that he purchases the loser’s share of the business at the price stipulated by the loser.
Both the Texan Shoot-Out and the Dutch Auction necessitate a thorough understanding of the business, economy and psychology. When a party makes an offer they need to determine a fair price for their share of the business, while at the same time considering the other parties ability to pay.
Both these factors will play a decisive role on who comes out the other end with the business. The psychological aspect comes into play when determining the price which would cause the other party to act in the manner you wish them to act. In many cases the party making the offer does not want to retain the business and in that case he needs to make the offer irresistible to the other party.
While the Texan Shoot-Out and the Dutch Auction differ in their construction, they achieve the same laudable result: the quick, clean, and fair resolution of a dispute, which could have dragged on for many months and given rise to costly litigation.