September 15th 2022
When purchasing shares in a corporation or allowing new investors to buy shares in your corporation, you should consider a Shareholder’s Agreement to help govern your company. There are a few different clauses you may want to consider, one being the “shotgun” clause, sometimes referred to as the buy-sell clause. After reading this article, you will better understand the “shotgun” clause and know precisely where to seek legal advice.
A “shotgun” clause is a special provision used in Shareholder Agreements to force a partner to purchase or sell the business to the offering partner. It is used to settle disputes and attempt to ensure a fair price for the shares in the corporation. The “shotgun” clause may occur with a shareholder offering to buy shares of other partners at a specific price. This notice requires the opposing shareholder to either accept the purchase price for the shares the offeror is willing to pay or match the price per share offered and purchase all outstanding shares of the offeror. In some cases, this allows for the quick cease of the partner’s relationship, or one party threatening to pull the “shotgun” clause may result in reasonable negotiations.
A disadvantage can occur when one of the shareholders has less financial ability, allowing the other shareholder to have an advantage. Suppose the more financially sound shareholder knows the opposing shareholder does not have the financial means to purchase the business. In that case, that shareholder may offer less than market value knowing that the less financially sound shareholder will have no choice but to sell the company for less than market value. If you are concerned about how a buy-sell provision can impact you, legal advice is recommended.
“Shotgun” clauses can be an effective tool when structuring a Shareholder Agreement and can often result in a fair and reasonable negotiation. You may find yourself appreciating the simplicity of ceasing a relationship with a business partner. If you are interested in knowing whether a Shareholder Agreement & the “shotgun” clause is right for you, always seek a lawyer’s expertise. As you now know, there are many benefits to Shareholder Agreements in Ontario. Liddiard Law Professional Corporation is more than happy to assist.
Brock A. Buckley, LLB
Articling Candidate, Corporate, Real Estate
Commissioner of Oaths
Office: (905) 374-1617 ext 304