A Simple Theory of Russian Roulette Provisions

Casimiro Nigro (Goethe University)

Abstract

An even allocation of control-rights in close firms is common and an inherent feature of close firms with two shareholders with a 50%-50% equity interest. Such arrangements come with the risk that the quest for unanimity may lead to so-called shareholder deadlocks – that is, the paralysis of the firm’s decision-making process at the shareholder level.
Shareholder deadlocks often leave the deadlocked shareholders with no option other than going for a so-called buyout – a transaction whereby one deadlocked shareholders buyout the other out.
Insofar as no other private ordering-based solution is available, the default technique for a buyout are extemporary negotiations. Contract offers an alternative: so-called “Russian Roulette provisions”, which in their simplest design require one deadlocked shareholder (the “triggering shareholder”) to serve a notice to the other shareholder (the “non-triggering shareholder), naming an all-cash price at which it values on a pro rata basis his shareholding. The non-triggering shareholder has then the option to either buy the triggering shareholder out or sell out to him at the established price.
The Article seeks to compare and contrast extemporary negotiations and the buyout procedure stemming out of Russian Roulette provisions in terms of their ability to lead to fair buyouts. It shows that, overall, the buyout procedure stemming out of Russian Roulette provisions are more effective than extemporary negotiations in leading to fair buyouts.
Building on this comparative assessment, it then discusses the role that regulation can play in this context.
Overall, the discussion articulated may prove useful in two main respects. On the one hand, it can support a more nuanced and consistent approach to law making and adjudication by legislators and judges, respectively. On the other hand, it may enrich the theoretical legal discussion, which has thus far looked at these private ordering-based solutions through merely formalistic lenses and has therefore fallen short of gaining a full understanding of both their virtues and vices.

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