What if there is a deadlock on decision making in your business?

If you are running a business, one of the most important questions you hope you won’t face is: what happens when there's a deadlock in decision-making?

Whether you're a startup with co-founders or an established business with multiple stakeholders, having clear governance structures in place can mean the difference between smooth operations and costly disputes.

Understanding the default company rules

Every company operates under default rules, which are established by company law and the company's articles of association. These rules govern how decisions are made, but most of these rules can be varied by agreement. This flexibility enables businesses to design operational structures that effectively meet their unique needs.

For business owners who wear multiple hats, often as both shareholders and directors, it can be crucial to understand which role you're acting in at any given time. The distinction matters because different rules apply depending on whether you're making decisions as an owner or a director.

How decision-making works by default

At director level

At a board level, the system is relatively straightforward, each director gets one vote, regardless of the number of shares they own, or whether they have any shareholding at all. Decisions are made when a majority of directors agree. This ensures that day-to-day operational decisions can be made efficiently by those directly responsible for running the company.

At shareholder level

Ultimate control sits with the owners of the business where voting operates differently. Voting power follows shareholding, meaning a majority shareholder naturally has greater influence over company decisions. However, the law also specifies how certain decisions must be made, so that shareholders should understand how voting percentages could affect the passing of resolutions.  A simple majority vote may not be sufficient.

The power of customisation

The benefit of company governance is that these default arrangements can be varied to meet your preferences. Through your company's articles of association or a shareholders' agreement, you can tailor the decision-making process to suit your business needs.

Consider these important questions:

1. What decisions can directors make independently, and which require shareholder approval?
2. Who has the right to be a director? And how can directors be removed if necessary?
3. Are there minimum numbers of people or specific individuals who must be present before important decisions can be made?
4. Most importantly: what happens when people disagree? How will deadlocks be resolved?

Planning for disagreement

While it may seem pessimistic to plan for conflict when relationships are going well, having a clear framework for handling disagreements is essential. Deadlocks can paralyse a business and prevent important decisions from being made when they're needed most.

The key is to discuss and agree on where important decisions should be made before you need to make them under pressure. Establish clear parameters and ensure everyone understands the process. This creates certainty and prevents confusion during critical moments.

Practical implementation

Most companies operate in whatever way works best day-to-day for their team and circumstances. The formal governance structures often remain in the background. However, having a robust fallback position becomes vital if relationships break down or serious disagreements arise.

Think of good governance structures like insurance - you hope you'll never need them, but when you do, you'll be grateful they're in place.

Taking action

If you haven't already, now is the time to review your company's decision-making processes. Make sure you understand the default rules which apply to your company and consider whether they are suitable for your situation, or you need to create custom arrangements through your articles of association or a shareholders' agreement.

Remember, the goal isn't to create bureaucracy - it's to create clarity, to understand roles and responsibilities. When everyone knows how decisions will be made and what happens if there's disagreement, your business can operate more smoothly and with greater confidence.

Having clear governance structures in place protects your business and relationships, ensuring that even in difficult times, your company can continue to move forward effectively.