Why a 50/50 Structure Is a Time Bomb
A 50/50 structure seems fair: both partners are equal. In practice, it means either of them can block any decision. No matter requiring a qualified majority will pass without both parties’ consent.
If the relationship deteriorates, the company cannot elect a new director, approve a major transaction, or distribute profits. This is called a corporate deadlock — and Russian law offers no automatic way out of it.
The solution is to build deadlock-resolution mechanisms into the company structure at the outset.
Mechanism 1. The “Russian Roulette” Buy-Sell Clause
One partner names a price at which they are prepared to sell their share or buy the other partner’s share. The second partner must either sell their share at that price or buy the first partner’s share at the same price.
How it works: if you name a fair market price, either outcome suits you. If you name too low a price, you risk losing your share cheaply. This creates an incentive for honest valuation.
Limitations: only works if both partners have the financial means to buy out the other. If both are cash-constrained, the mechanism breaks down.
How it’s documented: included in the shareholders’ agreement (Article 67.2 of the Civil Code). The company’s articles of association may contain restrictions on share transfers — ensure the mechanism is compatible with them.
Mechanism 2. Independent Arbitrator or Mediator
The shareholders’ agreement provides that when an irresolvable disagreement arises, the parties refer the matter to a pre-agreed independent third party — a mediator, arbitrator, or industry expert. Their decision is binding.
How it works: the third party reviews the situation and issues a decision — for example, whether to approve or reject a specific transaction, or how to divide assets.
Limitations: requires advance mutual trust in the mediator. If the parties are already in conflict, agreeing on a neutral figure becomes more difficult.
Mechanism 3. Dual Directorship or “Casting Vote”
In a 50/50 structure, the parties may agree in advance that one partner has a casting vote on certain categories of decisions — for example, operational decisions below a specified threshold. On other matters — parity.
An alternative is the appointment of an independent director to the board whose vote is decisive in the event of a deadlock.
Limitations: creates a de facto imbalance — one partner receives more power. A clear delineation of decision categories is essential.
If Deadlock Has Already Occurred
If no mechanisms are in place and the relationship has reached an impasse, the options are limited:
- Negotiation — a mediator or lawyer acting as negotiator sometimes helps.
- Sale to a third party — both partners sell their shares to a buyer. Requires both parties’ consent.
- Liquidation — judicial liquidation where the company’s objectives can no longer be achieved (Article 61 of the Civil Code).
- Exclusion of a partner — for a serious breach of duties (Article 10 of the LLC Law). High threshold, difficult to prove.
Prevention is better than cure. Spending 50,000–100,000 rubles on a shareholders’ agreement when setting up the business can save millions and protect the company.
Frequently Asked Questions
What is a corporate deadlock and why is it dangerous? A deadlock arises when two equal partners cannot pass any decision that requires both parties’ consent. Without an exit mechanism, the company cannot elect a director, approve a budget, or authorise a major transaction — the business is paralysed.
How does the “Russian Roulette” buy-sell mechanism work in practice? One partner names a price for their share. The other must either buy the first partner’s share at that price or sell their own share at the same price. The mechanism is set out in a shareholders’ agreement (Article 67.2 of the Civil Code) and incentivises fair valuation from the outset.
Can a partner be excluded from an LLC during a deadlock? Yes — under Article 10 of the LLC Law, a participant who systematically fails to perform their duties or materially obstructs the company’s activities may be excluded by a court order. This is a measure of last resort: specific breaches must be proven; general disagreement is not sufficient.
When may a court order the liquidation of an LLC because of a deadlock? Under Article 61 of the Civil Code, a court may order liquidation where achieving the company’s objectives has become impossible. A deadlock that has brought the company to a standstill is a recognised ground. Liquidation is applied only once all other mechanisms have been exhausted.
Read Also
- A Director Paid 50 Million Rubles From Personal Assets: Why Transaction Documentation Is Everything
- Bought a Business Share, Then Tax Claims Arrived: What the Supreme Court Says
Starting a business with a partner or already stuck in a deadlock? Contact us for a consultation — we will structure a shareholders’ agreement with exit mechanisms, or help resolve an existing dispute.