What Is A Shotgun Clause?
A shotgun clause is a commonly used provision in a shareholder agreement. It is also commonly referred to as a “buy-sell” clause. Essentially, a “shotgun clause” or “buy-sell clause” provides a legal and contractual mechanism for a shareholder “divorce” in the eventthat several owners of a company are not getting along. It also creates a form of liquidity in a private company in that it presents a mechanism to allow a shareholder to transfer their shares. Kahane Law Offers custom shotgun clauses in shareholder agreements at a flat rate. Call now for help in Calgary, Alberta 403-225-8810.
How Does A Shotgun Clause Work?
In a “shotgun” or “buy-sell” clause one owner can make an offer to the others (either individually, or together) to buy their shares at a certain price per share. This offer must either be accepted or, alternatively, the party initiating the sale will be forced to sell his or her shares at the price provided in the offer that he or she made to the other shareholders (either on a pro rata distribution, or one of the offered shareholders, provided the others consent, can elect to purchase the entire quantity of offered shares).
Without Proper Legal Advice A Shotgun Clause Can Cause Problems
The corporate commercial and start-up business lawyers at Kahane Law Office can ensure that your shotgun clause and shareholder agreement is properly drafted to ensure that you understand how it works and also guard against future problems.
Not every ownership structure benefits from a shotgun clause in a shareholder agreement. In fact, there are several problems that a shotgun clause can cause. For example:
- Passive shareholders are much less able to determine the value of the business than active shareholder (as a result they have an advantage in negotiations) because of no access to information;
- Both parties run risk of being bought out on cusp of company’s success;
- There can be a wealthy shareholder advantage (since they can price their offer out of the reach of the other shareholders, but less than the shares’ market value);
- A passive shareholder can’t run the company or develop technology without the help of active shareholders so they have no choice but to be bought out (and thus have lower negotiating leverage for a higher share price);
- Numerical superiority principle: It is difficult for smaller shareholders to benefit from a shotgun clause as the amount of money needed to buy out the other shareholders is considerably more than the other way around;
- The exercise of a shotgun clause can result in simply a form of “shareholder allocation shuffle” – for example one shareholder makes an offer to purchase to all the other shareholders (5 total). Three of the offered shareholders agree to sell to the offering shareholder and the other two shareholders agree to buy the offeror’s shares pro rata.
Don’t rely on boilerplate – get proper legal advice
To ensure that you don’t fall victim to these clause problems it is critical that you don’t just rely on a boilerplate shareholder agreement or shotgun clause. Get proper legal advice by contacting the corporate and small business start-up lawyers at Kahane Law Office in Calgary, Alberta today at 403-225-8810. We can help to draft your shareholder agreement and shotgun clause in line with the context and goals of your business. You can also email us.