What is a shotgun clause?
A shotgun clause is one of many clauses that one can include in a shareholders agreement. It provides one party to the shareholder agreement the means to exit the corporation or force another shareholder to exit a corporation – in essence, dissolving the existing partnership, without a triggering event, such as death, divorce, or disability. Without the shotgun clause, there is no other mechanism to force out a shareholder; there is only exit by agreement of both parties.
How does the shotgun clause work?
Any shareholder at any time can choose to serve the other shareholder with a notice that states “I intend to buy you out at x price per share.” The amount per share can be any amount under the sun and may have no relevance to the shares’ true valuation. The receiving shareholder then has a short period of time to decide whether to sell his or her shares to the offering shareholder and exit the corporation, or turn the offer around and force the exit of the offering shareholder at that same price.
In that instance, the receiving shareholder will purchase the offering shareholder’s shares at that price per share and force the offeror’s exit.
Is the Shotgun Clause dangerous?
As suggested by the term “shotgun,” it is a dangerous clause to include because when a shareholder wants to force the exit of another shareholder by purchasing his shares, he may, through the shotgun clause, unintentionally force his own exit.
Is the shotgun clause recommended to include in a shareholders agreement?
Where a shareholder has a stronger bargaining position relative to other shareholders through greater wealth or ownership of shares, then the shotgun is a useful clause to include. However, if the shareholder who wishes to trigger the exit of another shareholder from the partnership is not in a strong bargaining position, then the shotgun clause is not recommended since the receiving shareholder can turn around and force the exit of the offeror shareholder.
