The shotgun clause is a buy-sell clause that is written in a shareholders’ agreement to break a deadlock between them.
Here is an example :
The shareholder Romie offers to buy the shares of the shareholder Edward for $ 50,000.00.
In this case, Edward has 2 options:
1- Accept the offer to purchase his shares for $ 50,000.00. In this case, Romie becomes the owner of the shares and the company if there are only two shareholders.
2- Refuse the offer and, in this case, the “shotgun” clause provides that Edward must buy Romie’s shares for $ 50,000.00 and it is he who becomes the owner of the shares and the company if there are only 2 shareholders.
This method aims to set a fair price for the shares. The strategy will therefore be different whether we want to buy or sell our shares. In the event that Romie really wants to buy the shares of Édouard, she has an interest in offering him a reasonable price. For example, if she offers $ 25,000.00 for the shares of Edward, but the real value of the shares is $ 50,000, she may see Edward accept the offer at a very good price and she will have lost his bet by not offering a fair price. But, if Romie knows that Edward can not afford to pay $ 25,000.00 to buy back her shares as provided for in the “shotgun” clause in case of refusal of the offer, in which case it is she who will have made a good deal!
Without a shareholders’ agreement that provides for a shotgun clause, it is necessary to negotiate by mutual agreement the purchase or sale of its shares, which can continue for a long time. If the shareholders do not agree, the situation will be untenable and the company will eventually have to be liquidated.
There are several variants of a “shotgun” clause. Contact us for more information.