Russian roulette (Russian Roulette) as a mechanism for resolving corporate deadlocks

Limited Russian Roulette as a mechanism for resolving corporate deadlocks

Yerbol Nazhmidenov

Legal Adviser, AIFC Legal Services Board

Lawyer and partner of a law firm Law Council Group

In corporate relations between business participants, situations often arise when further cooperation becomes impossible due to irreconcilable differences. In such cases, especially if the parties share equal shares, the key issue is to break the deadlock that threatens the stability of the business. One of the radical but effective tools is a mechanism called "Russian Roulette".

Russian Roulette is a mechanism for resolving deadlocks, in which one of the company's participants offers another to buy out his share on certain conditions. The main essence of the mechanism is that the first participant sets the price and conditions under which he is ready to either sell his share or buy out the share of the second participant. The second participant must make a choice: either accept the sale offer, or turn the situation around and buy out the partner's share on the same terms.

Let's imagine a situation where a business is run by two partners who have irreconcilable differences. One of them, having decided that further cooperation is impossible, offers to buy out the share of the second. An important aspect of this mechanism is that the price and conditions are determined by the initiator of the offer. The second participant, in turn, has a choice: either sell his share at the offered price, or buy out the partner's share on the same terms.

This decision forces the parties to act quickly and decisively. As a result, Russian Roulette effectively resolves the deadlock situation when the parties can no longer run the business together
Although Russian Roulette is an effective tool, it has its pros and cons that should be considered when implementing this clause in corporate documents.

Advantages

Quick conflict resolution: Russian Roulette allows partners to make a quick decision, thereby preventing further losses and possible business stagnation.

A simple and clear process: The mechanism allows you to clearly and transparently determine the future of the company. One participant buys out the other's share, which avoids long and costly negotiations or lawsuits.

Disadvantages

Radical: This method is extremely radical and is not suitable for all situations. It can be excessively harsh, especially if one of the partners has fewer financial resources. Unequal conditions: The mechanism often works in favor of the one with more funds or a better understanding of the business. Thus, a participant with more limited resources may find himself in a vulnerable position. It's not always fair: Since the initiator of the offer sets the price, it is possible that the offer will be beneficial only to one party. This can cause discontent and further aggravate the conflict.
The Russian Roulette mechanism can be successfully applied within the framework of the Astana International Financial Center (AIFC), since its legal system is based on common law and the principles and norms of the law of England and Wales. This makes the AIFC an ideal jurisdiction for implementing similar corporate dispute resolution practices. Based on generally recognized principles of fairness and justice, the participants of companies in the AIFC can provide in advance in corporate documents mechanisms for overcoming deadlocks, such as "Russian Roulette", which helps to prevent further conflicts and maintain the stability of the business.

The judicial practice in the AIFC, based on the norms of common law, also contributes to the effective resolution of corporate disputes, including through mechanisms similar to those used in England and Wales. This creates confidence among business participants that their rights will be protected, and disputes will be resolved promptly and in accordance with the best international practices.

In corporate practice, other ways of resolving conflicts between partners are also used, such as:
Coin toss: The decision is made based on the coin toss principle. This is a more random and, as a rule, less preferable method, since it does not take into account the real circumstances and interests of the parties.
Negotiations and mediation: The use of mediators and negotiations to resolve conflict and reach consensus.
Judicial proceedings: As a last resort, you can apply for judicial dissolution of the company. However, this process can be long and expensive, and, as practice shows, judicial dissolution is not easy to obtain in all jurisdictions.

When is Russian Roulette the optimal solution?

Russian Roulette is suitable in cases where there is such a serious disagreement between partners that further joint business management becomes impossible, and the business begins to suffer. In the absence of dispute resolution mechanisms, a business may lose assets, lose customers, and the company as a whole may plunge into a state of stagnation.

How to avoid a deadlock?

The most sensible way to avoid a deadlock situation is to plan ahead. At the stage of business formation, when concluding agreements between participants (shareholders agreement), mechanisms such as "Russian Roulette" should be included in the statutory documents. In the jurisdiction of the AIFC, such mechanisms are particularly effective, as they comply with the principles of common law and can be used to quickly and clearly realize the interests of participants.

Russian Roulette is a powerful tool for breaking a deadlock, but it should be used with caution, understanding all the risks and consequences. Although it is not always fair and mainly works in the interests of a stronger partner, its effectiveness in resolving corporate conflicts is obvious. The inclusion of such a mechanism in corporate documents, especially in the jurisdiction of the AIFC, helps to set the rules of the game in advance and ensure a quick resolution of possible conflicts, preserving the interests of the business and its participants.

Exclusion of liability

The information in this note does not constitute legal or professional advice. No part of it can be relied upon, and no part of this note can be used in lieu of obtaining legal advice. The information in this note is intended for general information. It should also be noted that the law and practice of its application may have changed since the date of publication of this note. If you have any questions, please contact (WhatsApp: +7 (707) 384 83 52, email: info@lcg.kz ).