By: Rajah Lehal
When trying to separate from a co-founder or partner, shareholders carefully review the “shotgun” clause in their shareholder’s agreement. Shotgun or a compulsory buy/sell provisions are used in the “it’s you or me” situation when one or more of the shareholders decide that they can no longer proceed with the other(s).
Between two shareholders who own shares on a 50-50 split, this is a simple concept. I’ll write you a cheque (possibly fair market value) for all of your shares or you pay me the same value for my shares. (Picture one person pointing a shotgun at the other, or the other person wrestling it away and then turning the shotgun at the first person).
If drafted properly, the mechanism is intended to be automatic, and will include a time limit to accept/reject.
The messaging is “if I don’t hear back from you in a month I’ll assume you have accepted, here’s your money, thanks very much, get lost.”
Once the offer is made, it’s a serious offer and cannot be stopped or revised mid-way, because the targeted shareholders now have the opportunity to “wrestle down” their foes and to turn around the shotguns. If you’re in the “triggering” faction, your shares are immediately at risk of being bought. Of course, any side-deal can be worked about between the parties if all shareholders are able to come to terms.
With many shareholders, the scene is now of one group of people pointing shotguns at another group. Things get more complicated if some people want to wrestle away the shotguns and the other people don’t. This can be handled in two ways:
Acquired shares are usually allocated pro rata as well (or in some other mix if the purchasing shareholders agree) – so that a power imbalance doesn’t inadvertently arise. If any of the acquiring shareholders waive the right to pay for their shares, then the rest of the acquiring shareholders can take up the slack either pro rata for the shareholders who are willing to pay, or in some other mix agreed to between the acquiring parties, so long as all of the shares are acquired and paid for at the full offered price.
In some cases, the shotgun clause requires a certain minimum percentage of shareholding to proceed – so that a 5% shareholder cannot become a 55% shareholder simply because they have lots of available capital.
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