What is a shotgun clause?

A shotgun clause (also called a buy-sell clause) is commonly included in shareholder and partnership agreements to resolve a deadlock between business owners.

If the owners can no longer continue working together, one owner may offer to buy the other’s interest at a specified price. The recipient must then choose either to sell their interest at that price or buy the offeror’s interest on the same terms.

The idea is to create a fair and efficient way for one owner to exit while allowing the business to continue operating.

Why does it matter?

Although the concept is simple, a shotgun clause can have significant financial consequences.

Once it is triggered, the parties must follow the agreement carefully. If the notice is defective, the agreement is unclear, or the transaction cannot be completed, what was intended to resolve a dispute may instead become the subject of litigation.

For that reason, a shotgun clause should be viewed not only as an exit mechanism but also as a contractual transaction that must be capable of being completed in practice.

A real example

In Western Larch Limited v. Di Poce Management Limited, 2013 ONCA 722, one shareholder triggered a shotgun clause by offering two alternative transaction structures. One complied with the shareholders’ agreement, while the other did not because it failed to satisfy the agreement’s requirements concerning repayment of debt.

The Ontario Court of Appeal enforced the option that complied with the agreement and refused to enforce the one that did not.

The case demonstrates that courts generally enforce shotgun clauses according to the agreement the parties signed. They are not designed to achieve a fair result if the contractual requirements have not been followed.

Practical considerations

Before triggering or responding to a shotgun clause, business owners should consider whether the agreement clearly addresses matters such as:

• how the business will be valued;
• how shareholder loans and other debts will be treated;
• whether financing is realistically available; and
• how the transaction will close within the required timelines.

Addressing these issues while the relationship is still cooperative is often far less costly than resolving them through litigation after a dispute arises.

Business takeaway

A shotgun clause can be an effective way to resolve a business deadlock, but only if it is carefully drafted and properly exercised. Business owners should understand how the clause operates before relying on it and ensure that it reflects the commercial realities of their business, not just a legal formula.