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Shotgun Clause
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A buy-sell agreement where a shareholder wishes to sell his or her shares, or an irreconcilable disagreement on a fundamental issue in regards to the corporation breaks out between shareholders, the sale can be forced by the sell of the holdings of one shareholder to the other.
Also referred to as a shotgun buy-sell agreement and frequenyly a significant component of a shareholders agreement.
The most common shotgun clause provides that one shareholder gives notice to the other of exercising the shotgun clause and offering a price for the shares. This starts the clock and forces the receiving shareholder to either buy the instigator’s share at the stated price or sell his shares to the instigator at the stated price.
A sample shotgun clause where there are three shareholders:
“Whereby one shareholder can offer his shares for sale to the other two and they have 60 days in which to accept or reject. If they do not accept the offer, 'A' then has the right to buy the shares of 'B' and 'C' for the price originally offered by him.”
In Re Sunfour Estates, the Ontario Securities Commission described a shot-gun clause as: “... which give an owner the right, on notice, to purchase another owner's interest or alternatively to be bought out by that owner at the same price.”
In Landell Investments, Toronto judge Southey wrote:
“The joint venture agreement contained a buy-sell provision under which one side to the agreement, if it became dissatisfied, could make an offer to buy out the other side. The party receiving the offer was under an obligation to buy out the offering party within a limited period of time, failing which it was obliged to sell its interest in the property in the joint venture to the offering party at the same price. This provision was described as a shotgun buy-sell provision.”
In 2004, the Manitoba Court of Queen's Bench used these words in a relevant case called Gray v Gray:
"That agreement contains a 'buy sell' clause, allowing one shareholder to force the other to either sell his shares or to buy the offeror’s shares. This is commonly referred to as a shotgun clause. A shotgun clause is intended to end the shareholder relationship between the parties. Once triggered, the effect of the clause is that one shareholder or the other is bought out. There is no option to refuse or avoid its consequences if the clause is triggered as permitted in the shareholders’ agreement. If the shareholder receiving that offer chooses not to sell his shares, then he must buy the offeror’s shares at the price in the offer. The offeror is entitled to set the terms of the offer, and those terms are deemed to be included in the offeree’s offer to purchase."
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