What is a shotgun buy-sell clause in a shareholder agreement?
A shotgun clause (formally a mandatory buy-sell provision) is a mechanism in a shareholder agreement for resolving deadlock between co-shareholders who can no longer agree to continue in business together. It forces a clean resolution and avoids a prolonged standoff.
The mechanics work like this: one shareholder (the triggering party) names a price per share and offers to either buy the other shareholder's shares at that price, or sell their own shares to the other shareholder at that same price. The receiving shareholder must choose — accept the offer to sell at that price, or buy the triggering party out at the same price. This creates a strong incentive to set a fair price because the triggering party does not know which side of the transaction they will end up on.
The clause is called a "shotgun" because once triggered, it moves quickly and with finality. Some variants allow a short window for the receiving shareholder to decide, while others set a longer period to allow for financing arrangements.
Shotgun clauses work best when shareholders have comparable resources. If one party has much deeper pockets, the clause can be weaponized to force out a financially weaker partner. Alternative mechanisms — drag-along rights, right of first refusal, or third-party valuation processes — may be more appropriate in some partnerships. A lawyer can help design the right exit mechanics for your specific co-ownership situation.
Key takeaways
- A shotgun clause lets one shareholder name a price; the other must buy or sell at that price.
- The symmetric mechanism incentivizes fair pricing.
- It works best when shareholders have comparable financial resources.
- Alternative exit mechanisms may suit some structures better than a shotgun clause.