- A shotgun clause is a contract term, so its trigger, price rules and deadlines come from the wording of your own shareholders agreement.
- Because the price and process can have serious financial consequences, it is worth getting advice before you make or answer an offer.
- If a shotgun clause is used unfairly, a court can look at whether the conduct was oppressive or unfairly prejudicial under OBCA s. 248 and the BCE test.
You and your co-owner each hold half of a private company. You cannot agree on the direction of the business, decisions are stuck, and one of you has pointed to the buy-sell or shotgun clause in your shareholders agreement. Before anyone sends a letter, it helps to understand what the clause actually does.
A shotgun clause is meant to end a deadlock without a court case. It can work well, but it can also catch the person who makes the offer, or the person who receives it, off guard. This article explains the general idea, what to look for in your own wording, and the risks on both sides.
What a shotgun clause is
A shotgun clause, also called a buy-sell clause, is a term in a shareholders agreement that lets one owner force a buyout of the other. It is meant to give co-owners a way out of a deadlock, and how it works depends on the wording your owners agreed to. The agreement sets who can start the process, what happens to the shares and on what terms.
Because the clause can lead to a forced sale or purchase, the exact wording matters a great deal. It is worth having a lawyer read it with you before you rely on it.
Shotgun clauses and any valuation formulas come from the shareholders agreement itself, not from a standard rule that applies to every company. Two agreements that both say "buy-sell" can work very differently, so your own document comes first.
How the clause is usually triggered
Many agreements say the clause can only be used in certain situations, such as a deadlock on a major decision that continues after a set process has been tried. Others let either owner start it at any time. Which one applies to you depends on the wording.
Look for these points in your agreement:
- What counts as a deadlock, and whether a step such as discussion, mediation or a cooling-off period must come first.
- How the offer must be given, for example in writing and to whom.
- Whether the offer must be for all of the shares, and whether it names a price per share or a total.
- What the clause says happens if the owner who receives the offer does nothing.
If the steps are not followed exactly, the other owner may argue the offer is not valid. That is one reason to have the agreement reviewed before you act.
Price and timing
The price is set by the method written into your agreement. Some agreements instead use a formula or an independent valuation. Which approach applies is a question of your agreement, and the same is true of the timing.
| Question | Where the answer usually comes from |
|---|---|
| How long does the receiving owner have to respond? | The response period written into the clause |
| When must the sale close? | The closing date or closing period in the clause |
| How is the price paid? | The payment terms in the clause, such as cash on closing or over time |
| What happens to loans and guarantees? | The clause, the loan documents and any bank requirements |
Pay particular attention to short deadlines. A clause that gives the receiving owner little time to arrange financing can favour the owner who made the offer, especially if that owner prepared in advance.
Risks of making or receiving an offer
If you make the offer, the price and process can have serious financial consequences for you, so it is worth testing your numbers and your financing before you act. How this applies depends on your agreement and your situation, so it is worth confirming with a lawyer.
If you receive the offer, you may have to decide quickly. You may need a valuation, bank financing and advice from an accountant and a lawyer, all within the deadline in the clause. An owner with more cash, or who knows the finances better, can have an advantage.
Value is also often disputed. In one Ontario Court of Appeal case about a terminated shareholder, the trial judge set a value between two experts whose figures were $20.8 million and $52.8 million. That gap shows how far apart honest opinions about a private company can be.
Using a clause in a way that unfairly pushes the other owner out can lead to a court claim. The oppression remedy is in OBCA s. 248, and the Supreme Court of Canada's test asks whether the owner had a reasonable expectation that was breached and whether the conduct was oppressive, unfairly prejudicial or unfairly disregarded their interests. Whether that applies depends on the facts.
What to do next
- Find the signed shareholders agreement and any amendments, and read the buy-sell clause in full.
- Do not send an offer or any informal message about price before you understand the process.
- Gather recent financial statements, tax filings, loan documents and lease terms.
- Ask an accountant or valuator for a realistic range of value.
- Talk to a lawyer about the steps, deadlines and your financing before you make or answer an offer.
Frequently asked questions
Can I use a shotgun clause if my agreement does not have one?
A shotgun clause is a term of the shareholders agreement, so whether you have one depends on what your owners agreed. If your agreement has no buy-sell term, you would need to negotiate a buyout or look at other options, and a lawyer can explain which may fit your situation.
Who sets the price in a shotgun clause?
That depends on the wording of your shareholders agreement. Some agreements use a formula or an independent valuation, so check the wording.
What if I cannot afford to buy the other owner out?
You may have to sell at the stated price, depending on the clause. This is why it matters to understand your financing options and the response deadline before the clause is ever used.
Can a court step in if a shotgun clause is used unfairly?
It may. An owner can bring an oppression claim under OBCA s. 248, and the court considers whether there was a reasonable expectation that was breached and whether the conduct was oppressive or unfairly prejudicial. The outcome depends on the facts.
Sources
- Supreme Court of Canada, BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 — canlii.org
- Court of Appeal for Ontario, Murray v. Pier 21 Asset Management Inc., 2021 ONCA 424 — ontariocourts.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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