How A Shotgun Clause Can Save You Money
If you are a shareholder in a private corporation, it is important to consider drafting a Unanimous Shareholders’ Agreement (“USA”). A USA is a written agreement among all of the shareholders of a corporation which dictates the manner in which a corporation is governed, including how its shares are transferred. The USA will bind all future shareholders of the corporation unless it is replaced or amended by another USA.
A USA can be particularly useful for small businesses to provide more certainty in situations where the relationship between the shareholders breaks down and as such one or more shareholders must leave the company. A good clause which can be used to guard against resulting protracted shareholder disputes is to include a buy-sell or “shotgun” clause.
A shotgun clause in a USA allows a shareholder to make an offer to another shareholder to buy their shares at a specified price. If the offeree refuses to sell, they can turn around and force the offeror to sell to the offeree their shares on the same terms and conditions as specified in the original offer. In this way, the shotgun clause protects the integrity of the negotiations between the shareholders as a low-ball offer can be used against the offeror and force them out of the company at a low price. Consequently, shareholders will be motivated to be make a reasonable or fair offer resulting in an earlier agreement on the fair market value of the shares of the corporation, which is often the major contentious point in such circumstances holding back a needed resolution.
One example is where the corporation is holding a significant or unique piece of real estate and the best way to determine the fair market value of the shares of the corporation is to sell the real property. A forced sale is a tactic which can be used to strong-arm the shareholders who have a more vested or emotional interest into the real property into buying out the departing shareholders at a price above market value. Such unfair negotiations can be avoided with the presence of a shotgun clause which forces the parties to be reasonable in evaluating the price of the shares.
Nonetheless, shotgun clauses may not be appropriate in situations where there is significant financial discrepancy among the shareholders as it can be unfairly used by a wealthier shareholder to force out of the company a shareholder who they know does not have the financial means to buy the offeror’s shares and is only left with the option to sell. If this is the case with your particular corporation, it may be better to exclude such a provision from the USA.
In most situations, shotgun clauses are useful to help resolve shareholder disputes more efficiently. If you are unsure to whether or not to include a shotgun clause in your company’s USA, please contact our office to schedule a free 30-min consultation.