Deadlock with Mediation Clause
(Stockholders' Agreement)

Summary

This template clause is for use in a stockholders' (or shareholders') agreement to address deadlocks at a company's board level. This clause includes practical guidance and drafting notes. A stockholders' agreement's primary purpose is to define the shareholders' rights and obligations regarding the operations and decision-making process within the company. An important part of that process is determining how a deadlock at the company's board level should be resolved. For example, a board deadlock can result from an even number of directors (whether by original intent, because of someone's absence, or due to a conflict by one of the directors that disqualifies him/her from the vote). A standard mechanism to resolve a deadlock is binding mediation and/or arbitration, which involves the appointment of a neutral expert or experts and the selection of a set of pre-approved rules guiding the review of the matter. Compared to other deadlock resolution methods (such as a chairperson's tie-breaking vote, a forced sale of the company, or resorting to non-binding techniques first), the advantage of using mediation to resolve a deadlock is two-fold: (1) the deadlock is conclusively resolved at the end, and (2) the neutrality of the decision-making process allows the company to continue operations following the mediation. For a template stockholders' agreement for a Delaware corporation, see Stockholders' Agreement (DE S Corporation).