When deadlock strikes in the boardroom, having a clear exit strategy can be as crucial as the initial investment.
Among the arsenal for resolving such disputes are the “Russian Roulette” and “Texas Shoot Out” clauses – each offering a unique approach to crisis management in shareholder agreements. But would you ever consider deploying these high-stakes options?
What is a “Russian Roulette Clause”
This clause is dramatic in its simplicity and consequence. When two parties are deadlocked, one party offers to buy out the other at a specified price. The catch? The receiving party can either accept the buyout or purchase the offering party’s shares at the same price, effectively turning the tables. This method ensures a quick resolution, but it is not without its risks.
What is a “Texas Shoot Out Clause”
A Texas Shoot Out starts when shareholders cannot agree and opt to resolve it by bidding. Each party submits a sealed bid to buy out the other’s interest. The highest bidder wins the right to buy the shares, ideally ensuring that the shares are sold at a fair market price. This method can also bring about a swift end to stalemates but requires careful financial readiness from all involved.
Both clauses are designed to force a resolution, potentially sidestepping prolonged disputes and the associated costs and disruptions. Especially in a Texas Shoot Out, there’s an incentive to offer a fair price since underbidding could result in losing control, while overbidding is not financially prudent. These mechanisms demand decisive action from shareholders, which can be an advantage in market conditions where lingering indecision could harm the company.
What are the risks – gambling in Governance?
In both scenarios, a less financially robust shareholder could be forced out, not through lack of rights or contributions, but merely due to lesser financial muscle.
There is a potential for manipulation i.e. if one party has superior knowledge of the other’s financial situation or market conditions, they can game the system to their advantage, particularly with the Texas Shoot Out. Furthermore, These high-stakes solutions can create or exacerbate tensions among shareholders, possibly impacting long-term business operations and relationships.
Incorporating a Russian Roulette or Texas Shoot Out clause into a shareholder agreement is no small decision. These mechanisms can serve as the corporate equivalent of a tie-breaker in sports—a quick, clean cut to resolve a deadlock. However, the use of such clauses requires equal financial footing among shareholders and a mutual understanding of the risks involved.
Would you include these high-stakes options in your SHAs? Would the potential for a quick resolution outweigh the risks of financial duress or relational fallout?
By Androulla Poutziouris, Executive Director at the European Legal Training Center (ELTC)
Androulla Poutziouris will be teaching an online, practical seminar on Drafting and Advising Clients on Shareholders Agreements, starting on 22 April.
You can find more information about the seminar in the following link >>
