Two people start a company as equals. Everything is agreed verbally, because they are friends, or brothers, or have worked together for a decade.

Four years later they disagree about something fundamental — a new investor, selling the business, one of them not pulling their weight — and neither can outvote the other. The company cannot decide anything, and there is no mechanism to break it.

This is deadlock. It is entirely predictable, and almost entirely preventable at the start.

What the constitution alone does not solve

The Companies Act 2017 and your articles cover the mechanics — meetings, votes, transfers, directors. They do not cover the commercial understanding between shareholders: who runs what, who can be removed, what happens if someone wants out, and how a valuation is arrived at.

That is what a shareholders' agreement does, and it is a private contract that sits alongside the articles. Where the two conflict, the position becomes messy — so align them deliberately.

What the agreement should cover

Shareholding and contributions. Money, assets, work, and customers — recorded, so nobody re-argues it later.

Vesting. Shares earned over time, so a founder who leaves in month six does not keep a third of the company. Almost nobody in Pakistan does this, and it is the cause of many of the disputes we see.

Board composition and management. Who appoints directors, who is a managing director, and what powers are delegated.

Reserved matters. The decisions requiring unanimity or a supermajority — issuing shares, borrowing above a limit, selling assets, changing the business, related-party transactions, and remuneration.

Funding. What happens when more capital is needed, and the consequences of a shareholder not participating — anti-dilution or dilution, stated plainly.

Dividend policy, so profits are not left permanently in the company by whichever side controls the board.

Transfer restrictions — pre-emption rights first, then:

  • Tag-along, so a minority can join a sale by the majority
  • Drag-along, so a minority cannot block a sale everyone else wants
  • Permitted transfers to family or holding entities

Leaver provisions. What happens to shares when a shareholder leaves, distinguishing a good leaver from a bad one, and how the shares are priced.

Valuation mechanism. A named independent valuer or an agreed formula. Without one, every exit becomes a negotiation with no floor and no ceiling.

Restrictive covenants, drafted realistically — bear in mind section 27 of the Contract Act 1872 limits restraints of trade, so confidentiality and non-solicitation carry more weight than broad non-competes. See protecting your business when an employee leaves.

Confidentiality and IP, assigning to the company what the founders create. See the contracts every business should have.

Deadlock resolution — the clause everyone omits.

Dispute resolution, and for foreign shareholders, arbitration with a properly specified seat. See drafting an arbitration clause and enforcing foreign judgments and awards.

Deadlock mechanisms that actually work

Choose one before you need it:

Escalation. The dispute goes to the shareholders personally, then to mediation, within fixed timeframes. Resolves more than people expect.

Casting vote or an independent director, held by an agreed neutral. Simple, but it changes control, so it must be chosen consciously.

Shoot-out (Russian roulette). One shareholder names a price; the other must either buy at that price or sell at it. Elegant, self-policing on price — but it favours the party with cash, so it suits equals with similar resources.

Texas shoot-out. Both submit sealed bids; the higher bidder buys. Same caveat.

Put and call options at a valuation determined by a named independent expert. Slower, fairer where the parties are unequal in liquidity.

Wind-up as the backstop. Effective as a deterrent precisely because nobody wants it — which is what makes the earlier steps work.

If you are already deadlocked

Where there is no agreement, the options are narrower but real:

Negotiate a buy-out, with an independent valuation, in a documented process. This resolves most of these disputes and is far cheaper than the alternatives.

Statutory relief for oppression and mismanagement. The Companies Act provides a remedy where a company's affairs are being conducted in a manner oppressive to members or prejudicial to the company's interests. The court has wide powers, including ordering the purchase of a member's shares. This is the principal protection for a minority shareholder being squeezed out — excluded from management, denied information, or watching value leak through related-party transactions.

Inspection and investigation. Applications can be made where there are grounds to believe affairs are being conducted improperly.

Winding up on just and equitable grounds, as a last resort — the deadlock itself, or the loss of the substratum of the business, may support it. It is blunt: it usually destroys value for everyone, which is why it works better as leverage than as an outcome.

Injunctions to preserve the position — restraining share issues, asset disposals or removal of directors while the dispute is resolved. See stay orders and injunctions.

Alongside all of this, keep the company compliant. Filings, accounts and statutory registers do not pause because the shareholders are fighting, and non-compliance gives the other side a grievance and the regulator a reason to act.

Family companies

Most Pakistani private companies are family companies, and the disputes carry two extra layers: succession, when shares pass on a death, and the fact that a commercial fight is also a family fight.

Deal with succession expressly — what happens to shares on death, whether heirs join the board, and how the estate is bought out if they do not. Otherwise a company ends up owned by heirs who never agreed to work together. See who inherits what and making a will where assets are in two countries.

For foreign and overseas investors

If you are investing from abroad into a Pakistani company, the protections that matter are reserved matters, information rights, exit mechanics, and a dispute clause that produces an enforceable outcome against local assets. See joint ventures with a Pakistani partner, branch, liaison office or subsidiary and repatriating profits and capital.

How the firm can help

We draft shareholders' and joint venture agreements with exit and deadlock mechanics that work in practice, align them with the articles, and act in shareholder disputes — negotiated buy-outs, oppression and mismanagement proceedings, injunctions, and arbitration.

See corporate and commercial, or contact the firm. If you are still on good terms, this is the cheapest document you will ever sign.