Shareholders at odds and ready to dissolve: How to break the deadlock?

Co-founders start as brothers-in-arms, only to turn against each other when things go south. When two shareholders each hold 50% of the equity and neither yields, the company becomes a "zombie business." What's the solution?

1. What is a corporate deadlock?

A corporate deadlock occurs when conflicts between shareholders or directors escalate during a company's operation, rendering the shareholders' meeting or board of directors unable to pass effective resolutions and causing severe difficulties in management. The most typical scenario is when two shareholders each hold 50% of equity, making it impossible to achieve the statutory majority for any resolution.

II. Judicial Dissolution: The Ultimate Remedy

Article 182 of the Company Law stipulates that if a company's management encounters severe difficulties, its continued existence would cause significant loss to shareholders' interests, and such issues cannot be resolved through other means, shareholders holding 10% or more of all voting rights may request the People's Court to dissolve the company.

However, note that judicial dissolution is a "last resort." Courts prioritize mediation and will only order dissolution if no other solutions are available.

III. A Superior Solution: Equity Buyback and Exit Mechanism

Rather than a chaotic dissolution akin to "fish and net both destroyed," the following approaches are more rational:

1. One party acquires the other's equity: price negotiated or fair value determined through valuation;

2. Bring in a third-party investor: Dilute both parties' equity to break the deadlock.

3. Corporate Spin-off: Splitting the business to meet individual needs.

4. Predefined Exit Mechanism in the Articles of Association: Establish deadlock resolution protocols at the time of formation.

IV. Prevention Is Better Than Cure

1. Avoid equity structures like 50:50; set reasonable equity ratios.

2. Include deadlock resolution clauses (e.g., mandatory buy-sell provisions) in the company's articles of incorporation.

3. Establish an effective corporate governance structure and decision-making mechanism;

4. Conduct regular shareholder communications to promptly address emerging conflicts.

The longer a corporate deadlock persists, the greater the losses. If you're facing such challenges, contact the Commercial Team at Fujian Ciji Law Firm—we'll help you find the optimal solution.