The Russian roulette clause has recently come to the forefront of the Italian news and has thus become known to the public, but its popularity is becoming exponential due to its ability to resolve corporate conflicts in a peaceful manner. Let’s take a look at how this clause works and why it would be a good idea for companies to participate in this dangerous game.     

The Russian roulette clause (also called the cowboy clause) is a new clause that is rapidly appearing in many corporate bylaws, which aims to find a solution to power gridlock situations within corporations.

This clause has recently been highlighted in the Italian news with reference to a court case concerning the recognition of the ownership of an extremely well-known podcast. Although this judicial affair is, to date, the best known, the application of this clause is becoming increasingly widespread.

But how does the clause work?

Let’s imagine the scenario in which a company has two shareholders who control 50 percent of the company’s shares, respectively. Then each shareholder has the right to appoint a director, and thus the company will have a board of directors consisting of two directors (or another even number of directors), half of whom represent the interests of one shareholder and the other half – the interests of the other shareholder.

Therefore, in this situation it is easy to imagine how deadlocks can arise, for instance, because the shareholders’ meeting cannot approve the financial statements or the directors cannot agree on the administration of the company.

Thus, with the Russian roulette clause, one of the two shareholders has the power to shoot (only metaphorically) the other shareholder, assuming certain consequences. In fact, with the activation of this clause, a mechanism is triggered at the end of which one of the two shareholders will be forced to transfer its own share to the other.

In particular, upon the occurrence of the deadlock event (usually defined by the same clause as an irremediable situation that prevents the regular operation of the company) each of the two shareholders has the right to propose to the other the purchase of the latter’s share at a specified price.

The shareholder receiving the proposal to purchase its shares has 30 days to decide and may decide in three different ways: (i) accept the proposal made by the other shareholder and sell its shares at the proposed price (ii) make a counterproposal and then propose to the shareholder activating the clause to purchase the other shareholder’s shares at a price higher than the proposed one; (iii) reject the proposal.

However, the rejection of the proposal is not without consequences since the shareholder who decides to reject the proposal is then forced to purchase the shares of the other shareholder (the one initially proposing and now forced to sell its own shares) at the proposed price at which the first shareholder had proposed to the second shareholder to purchase its shares. Despite the obvious danger of this clause, which once activated entails a total change of control of the company, its effect in resolving corporate conflicts has nevertheless been appreciated and, for this reason, as anticipated, it is becoming increasingly popular in Italian company statutes.