If you are purchasing shares in a company, or if you are already a shareholder and are considering implementing a shareholders’ agreement to govern your company, one of the most important provisions you will want to consider is the buy-sell or “shotgun” clause.
A shotgun clause provides an important lever to be used in the event that a shareholder, for one reason or another, needs to part ways with the other shareholders of the company.
Specifically, a shotgun clause is a provision in a shareholders’ agreement which gives any shareholder the right to make an offer to the other shareholders to buy their shares for a certain amount of money that is specified in the notice. And if those shareholders refuse, they are then forced to buy the shares of the shareholder who made the offer (the offeror) for the same price per share and on the same terms.
The genius underlying shotgun clauses is that they compel all sides to be reasonable, as a bad or unreasonable offer can easily turn against the offeror, leading to them being forced out of the company.
Time and time again, we see long and drawn out disputes between shareholders that could have easily been resolved by including a shotgun clause in their shareholders’ agreement. As is often the case in disputes, shareholders tend to be very reasonable when negotiating provisions in the abstract, but are notably less reasonable when actively engaged in a dispute. And this unreasonableness tends to rise to the surface when discussing how much value to attribute to a shareholder’s ownership stake. These disputes can go on for years, and take a significant toll on the company’s morale, productivity and profits.
Many such disputes can be completely avoided by including a shotgun clause into the company’s shareholders’ agreement. This will force the parties to take action in specific ways, with the ultimate result being that someone leaves and someone stays, both on reasonable terms.
That said, there is some inherent unfairness in the shotgun structure, that being that it is heavily biased toward those who can afford to pay for the other shareholder’s shares. This is something to keep in mind when deciding whether or not to include such provisions. However, even this bias is balanced, to some extent, by the value that each shareholder brings to the company, as even a wealthy and greedy shareholder would be reticent to remove someone who provides inherent and irreplaceable value to the company.
Shotgun clauses are an effective tool that (if all goes well) will likely go unused, but as soon as relationships break down, as they often do, you will be thankful that you have an approach built-in to your shareholders’ agreement that forces all parties to come to a reasonable and final resolution.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. ext.304, [email protected]