Shareholder Agreements – Part Five

Shareholder Agreements: 5) Shotgun clause

A simple and effective way to facilitate a buy out is to add a “shotgun clause” to an agreement. Under a shotgun clause, one shareholder offers to buy the other shareholder’s shares. The other shareholder can either accept the offer or buy out the offeror’s shares on the same terms. The idea is to ensure a fair price for the shares.

This mechanism can be unfair if one shareholder has considerably greater financial resources than the other. In such situations, the offeror may be in a much better position to force a sale on unfavourable terms.

Such a situation can be avoided by adding a clause that imposes a fair market value on shares subject to shotgun clause offers. Fair market value can be determined by appraisal, formula or arbitration.

Located in: Corporate and Commercial Law