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I have previously written an article on shareholders agreements, a topic that covers many issues, some of which frequently turn up during discussions with my clients. One of these issues is undoubtedly both of interest and concern for many clients: the shotgun clause (also called “compulsory buy-sell clause”).

The target

Roughly speaking, a shotgun clause facilitates a shareholder separation when it is otherwise impossible to get along. It’s often the last possible option to break a deadlock or avoid a trial at court. Usually, if shareholders get to the point where it is inconceivable to pursue their partnership, the best thing for everyone, including the business, should be to implement the shotgun clause.

Pressing the trigger

More precisely, when a shareholder triggers the shotgun clause, he offers to buy all of the shares held by his partner or otherwise, offers to sell him all of his shares. This offer will set-out the price the shareholder is willing to sell or buy the shares. Further to this initial step, the other shareholder needs to decide: he must either sell his shares at the price offered or buy his partner’s shares at that same price. Regardless of which option he selects, one of the shareholders will have to leave the business. Such a clause can also be drafted when there are more than two shareholders.

Potential injury!

Some suggest that a shotgun clause may sometimes create unfair situations when one of the shareholders is in a better financial position than the other. In such a scenario, the wealthier shareholder could exercise the shotgun clause at a below-market price, knowing that his partner will be unable to match it. This subtlety is far from foreseeable when signing a shareholders’ agreement. This example shows the importance of getting all the relevant information regarding the various clauses included in shareholder agreements before you sign them!

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