How does a shotgun clause in an Ontario shareholder agreement actually work?
A shotgun clause (also called a buy-sell clause) is a dispute-resolution mechanism built into many shareholder agreements. It works as follows: one shareholder names a price per share and offers either to buy the other shareholder's shares at that price or to sell their own shares at the same price. The receiving shareholder then has a set period — the agreement will specify how long — to choose one of those two options.
The idea is that the shareholder setting the price has an incentive to be fair, because they don't know which side of the transaction they will end up on. In practice, the clause works best when the shareholders have roughly equal financial resources; if one party is significantly wealthier, the other may be forced to sell even if they don't want to, simply because they can't raise the funds to buy.
Ontario courts have generally enforced properly drafted shotgun clauses. If your shareholder agreement contains one, or if you're negotiating a new agreement, it's worth understanding the financial and strategic implications before you sign.
Key takeaways
- A shotgun clause lets one shareholder name a price and force a buy or sell at that price.
- The offering party doesn't know which role they'll play, incentivizing a fair price.
- Financial disparity between parties can distort how the clause operates in practice.
- Ontario courts generally enforce these clauses when properly drafted.