A client came to me last year with a problem she could not solve. She had bought into her employer’s business three years earlier. He owned half, she owned half. They were both directors. It had worked well until a large contract came along that she wanted to take on and he did not.
They disagreed. Then they kept disagreeing. And there was nothing either of them could do about it.
She could not outvote him. He could not outvote her. The board was two people who could not agree, and the shareholders were the same two people. The company could not sign the contract, could not decline it, could not do anything at all until one of them changed their mind. Neither did.
This is the 50/50 problem. Everything can work perfectly well until the owners disagree.
Why people choose 50/50
Equal ownership feels fair. Two people going into business together, contributing the same money or the same effort, split the company down the middle. Nobody is the boss. Nobody is the junior partner. It feels like a partnership of equals, which is usually what it is meant to be.
The same logic applies when someone buys into an existing business. The founder wants to bring in a successor but is not ready to hand over control. The successor wants a real stake, not a minority position. They settle on half each. It feels balanced.
It is also the structure that gets chosen when nobody wants to have the awkward conversation about who is in charge.
What 50/50 actually means
A company makes decisions in two places. Shareholders vote on some things. Directors decide the rest.
Most shareholder decisions need a majority of the votes cast. At 50/50 there is no majority. Any decision one shareholder opposes simply fails. Neither can appoint a new director. Neither can remove one. Neither can change the constitution, approve a major transaction, or force a dividend.
The board is the same. Two directors, one vote each. If they disagree, the resolution does not pass. The default rules give the chair a casting vote, but most constitutions set their own rules, and in a two-person company the question of who chairs the meeting becomes the question of who controls the company. Which is exactly the question 50/50 was chosen to avoid.
So what you have is two people who each hold a veto over everything and a positive power over nothing. That works perfectly as long as they agree. The moment they do not, the company stops.
The three situations that break it
Disagreement. This would seem to be the most obvious situation and yet an astonishing proportion of people do not plan for it. It does not have to be a falling out. Reasonable people disagree about whether to borrow, whether to expand, whether to hire, whether to sell. At 50/50 there is no mechanism to resolve any of it.
Death or incapacity. One shareholder dies. Often their shares pass to their estate, and eventually to a spouse or child who may know nothing about the business. The surviving shareholder is now in a 50/50 company with someone they did not choose, who has every power the deceased had and no interest in running the business. This too happens more often than people expect.
One wants out. A shareholder wants to sell. To whom? A stranger who will hold half the company and half the vetoes? The other shareholder, at what price? Without a mechanism there is no answer, so the person who wants to leave cannot, and the person who wants to stay is stuck with them.
What happens if nothing is agreed
The law does provide a remedy for a company that cannot function. A court can wind it up on the basis that it is just and equitable to do so. It can also intervene if one shareholder’s conduct is oppressive to the other.
These are real remedies and they get used. They are also slow, expensive, public, and destructive. Winding up means the business is sold or closed. Oppression proceedings mean months of litigation between two people who have to keep working together in the meantime. Nobody who has been through either would describe it as a solution.
The fixes
None of this is complicated to solve. It just has to be solved before it is needed, which is the part people get wrong.
A deadlock mechanism. When the board or the shareholders cannot agree, what happens next? The common answers are a cooling off period followed by a second vote, referral to an independent expert whose decision is binding, or referral to a named mediator. Some agreements escalate through all three. The point is that the company keeps moving rather than freezing.
A buy-sell clause. Sometimes called a shotgun clause. If the deadlock cannot be broken, one shareholder can offer to buy the other out at a stated price. The other must either accept that price or buy the first shareholder out at the same price. It is brutal and it is effective, because nobody names a price they would not be willing to pay or receive.
A casting vote, deliberately allocated. Some 50/50 companies give one shareholder a casting vote on defined matters. The founder keeps it on questions of strategy; the incoming partner gets it on day-to-day operations. It is not equal, but it is agreed, which is better than a silence that resolves itself in court.
Pre-emptive rights. Before a shareholder can sell to an outsider, the shares must be offered to the other shareholder first, at the same price. This is what stops a stranger arriving.
Death and incapacity provisions. What happens to the shares. Usually the surviving shareholder has the right to buy them from the estate, at a price set by a formula or an independent valuation, often funded by insurance taken out for the purpose.
A valuation mechanism. Every one of the provisions above needs a price. Agree the method now: a multiple of earnings, an independent valuer, a formula. Agreeing the method while both parties are on good terms is easy. Agreeing it during a dispute is not.
When to do it
Before completion. Not after.
This is the part that matters most and the part that most often goes wrong. Two people about to go into business together both want to complete. That shared goal is the leverage that gets a deadlock deed signed. They will agree terms in an afternoon because they are both looking at the same finish line.
The day after the shares transfer, that leverage is gone. Each of them now holds a veto. If one of them decides they do not want a deadlock mechanism after all, there is nothing the other can do. The 50/50 problem has already arrived, and its first casualty is the agreement that would have prevented it.
So the answer to “can we sort out the shareholders agreement later” is that you can, but you may not be able to. Later is when it becomes optional for the person who does not want it.
It does not need to be long
People hear “shareholders agreement” and picture forty pages and a five-figure legal bill. For a two-person company the essential protections fit in a short deed. Deadlock, death, exit, and a way to set a price. Four things.
The rest can wait for a fuller agreement when the business is established and there is more to govern. But those four cannot wait, because they are what allows the company to survive the day the two of you disagree.
And what happened in this case?
My client and her business partner eventually resolved their contract dispute. It took nine months, the contract went to a competitor, and the relationship did not recover. A three-page deed signed at completion would have resolved it in three weeks.
If you are buying into a business or putting a new ownership structure in place, get in touch for a chat.
Emily McMullan is the principal of McMullan Lawyers (Aust), a Sydney practice advising owners of small and medium businesses on acquisitions, ownership structures and commercial agreements. This article is general information only and is not legal advice.
