Shareholders’ Agreement – Resolving a Deadlock and the Shot-gun
We have previously blogged on the benefits of having a shareholders’ agreement. For companies with a small number of shareholders, a shareholders’ agreement can address how a failure to reach an agreement, or a deadlock, is handled.
Many shareholders’ agreements provide that if an agreement can’t be reached, the parties must use mediation or arbitration. In addition to these options, or instead of them, a shareholders’ agreement can also include a shot-gun clause. A shot-gun clause is an extreme solution, and may not be appropriate for some businesses or their shareholders. Typically, a shot-gun clause would work as follows:
- Shareholder A exercises the shot-gun clause by offering to purchase all of the shares held by Shareholder B for a stated price per share, or offers to sell all of their shares for the same price per share
- Shareholder B has the option of either selling their shares for the stated price, or buying Shareholder A’s shares for the stated price
A shot-gun clause, when triggered, basically results in a shareholder selling out to another shareholder. The shareholder who does not exercise the right gets to choose whether to sell out, or buy out the other shareholder. While this may be an effective way to break a deadlock (by getting rid of a shareholder), a shot-gun clause is only a fair way to deal with a dispute if both parties are on equal financial footing (if one shareholder has more resources than the other, they may be able to use a shot-gun clause to their advantage).
Thinking of putting a shareholders’ agreement in place for your company? Contact us.
This blog post is intended to provide general information and does not constitute legal advice. You should consult a lawyer for advice regarding your individual situation.
Every effort has been made to ensure the contents of the blog post were accurate as of the date it was written, however, the law can change and we cannot guarantee that the information remains accurate. In addition, because the comments above are of a general nature, they may not apply for every situation. If you have questions, please contact us and we would be happy to discuss your individual circumstances, and whether there have been any changes to the law that would affect the information presented.