Do I Need A Buy-Sell Clause In My Business?

The term buy sell clause is heard frequently in relation to businesses. Maybe people reference these clauses incorrectly. Buy sell clauses in shareholder agreements have very specific meanings and uses. Even though they are used often, they may be misused and cause problems between shareholders. Consequently, it is very important to properly word buy sell clauses. If you have one or more shareholder, you may want to incorporate a buy sell clause into your shareholder agreement. Kahane Law Office in Calgary, Alberta is able to help explain, draft and customize buy sell clauses as clients need. Call today: 403-225-8810.

What are Buy Sell Clauses?

“Buy sell clauses” are a common clause found in a shareholder agreement. They are also known as buy and sell clauses, buy-sell clauses and shotgun clauses. A clause is just a individual term or specific item agreed to by the parties to

the agreement. It provides a mechanism for “divorce” in the event that business owners or partners are not getting along. Buy sell clauses also provide for a means of liquidity in a small business setting where there might not be an easy market to sell the shares. You will usually find buy sell clauses in unanimous shareholder agreements. Alternatively, they can also be drafted as stand-alone agreements between shareholders in a company.

How does a “Shotgun” or “Buy-Sell” Clause Work?

In a shotgun or buy-sell clause, one owner will make an offer to the other owners, either individually or collectively. They either “buy” their shares at a set price, or to “sell” the shares that they own at the same price. The “offer to buy” can have two outcomes. The first is to be accepted by the other shareholders and thus trigger a sale of their shares to the party who initiates the buy sell.

The other outcome is that the “offer to buy” can be rejected, thereby triggering an “offer to sell” by the initiating party. The result of which is that the party who initiates the shotgun then sells their shares to the other parties, either to an individual or collectively on a pro rata basis. A buy sell clause can be very effective to provide for a clean break of shareholders who no longer wish to work together. It is also a hedge against risk in the future for company founders.

Can Buy Sell Clauses Cause Problems?

Yes, a poorly drafted, or boilerplate buy sell clauses, can cause problems. Without proper safeguards you can end up with a situation where a wealthy shareholder can take advantage of shareholders with less financial means. You can also have a “shotgun shuffle” where shares are simply reallocated because of multiple elections of “offered” shareholders (one offered shareholder elects to sell and another elects to buy”. Also, it can favor active shareholders over passive shareholders. This is because active shareholders are more likely to be able to run the business. Active shareholders also understand the true valuation, therefore they hold a negotiating advantage.

Determining If Your Business Needs A Buy sell Clause?

Every business is unique. You should seek legal advice on the nature of your ownership structure in your business. You should also talk to a lawyer to avoid the problems that can arise in poorly drafted shotgun clauses. The start-up business and entrepreneurial (part of our corporate / commercial legal team) lawyers at Kahane Law Office will help you to draft the Shotgun or Buy-Sell Agreement that is best for you. Call us today at 403-225-8810 in Calgary, Alberta), or email us directly here.