Companies bring together people with a similar vision and views on business, but it is not always easy for owners to make joint decisions. Sometimes shareholders can get stuck with different opinions. Fortunately, there are some mechanisms in company law to overcome it. These arrangements can be enshrined in companies’ statutory documents in the form of special clauses such as the Russian Roulette clause, the Texas Shoot-out clause, or the BMBY clause. We will cover all these provisions in the next few articles, but let’s start with the so-called “Russian roulette”.
A Russian roulette clause was invented for resolving deadlocks, usually in companies with 50/50 ownership, where both parties have equal financial positions. Under Russian roulette, one party offers to either buy the other party’s shares or sell its own shares to the other party at the certain price. The party who receives the offer can either accept it or reverse it at the same price.
The term “Russian roulette clause” generally covers clauses that are used to resolve shareholder conflicts in two-person companies by foregoing one of the shareholders according to certain conditions. Each shareholder has the right to offer his share to another for purchase at a certain price. If another shareholder receives such an offer, he has a choice to accept the offer and becomes the sole shareholder by paying the price demanded by his co-shareholder, or he sells his shares to his co-shareholder at the same, mandatory price.
Adding this clause to company’s documentation, the parties must prescribe several important conditions:
- what is considered a deadlock (for example, non-observance of the quorum and majority of votes required to resolve certain key issues: approval of financial statements, sale of assets, etc., or inability of the parties to renew the shareholder agreement during two or three consecutive meetings of the board of shareholders);
- what the shareholders can do in case of a deadlock (for example, the shareholder has the right to freely determine the price of his share, not related to any predetermined valuation criteria, and offer the other party, as an alternative, to buy out his share or sell him the share of the other party at the same purchase price).
The idea is, that if the clause is drafted correctly by the parties, then determining a disproportionate purchase price is not in the interest of the shareholder. Considering that the offeror may be obliged to purchase the share of the offeree, setting an unreasonably high purchase price is not in his interest. And the potential acceptance of the offer by the offeree does not allow the offeror to submit an unreasonably low offer.
The Russian roulette clause is considered to be originated in Anglo-American practice, but it is also broadly used and is permissible in Europe. Although it may sometimes be found unenforceable under certain circumstances, there are several well-known European court decisions which have found that the clause is a valid and effective method of resolving corporate deadlocks (for example, the decision of the Higher Regional Court of Nuremberg of December 20, 2013 or the Court of Rome decision of October 19, 2017). That’s why it is important to draft it carefully and pay attention to fairness of the conditions.
With these judgments in mind, we can take into account a few tips on how to draft a Russian roulette clause that is legally binding, taking into account the principles of European law.
First, it is fundamentally important to determine with a high degree of accuracy the circumstances that trigger the operation of the Russian roulette mechanics. Under no circumstances should the activation of the clause be left to the discretion of the parties.
Second, it is important to avoid Russian roulette points having any “punitive” effect on shareholders who do not intend to renew shareholder agreements or make any other specific decisions (especially those that are not in the interests of the company).
In any case, this mechanism can help in a difficult situation, and, of course, it should be taken into account when preparing documents for a company with a 50/50 shareholding.
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