A Duel at High Noon in the Boardroom: The shotgun buy-sell offer.

Despite the title of this blog, we are not advocating for Hollywood-style duels amongst quarreling shareholders at High Noon. Let’s leave re-enactments of the gunfight at the O.K. Corral to the movies, okay? Instead, this blog discusses shotgun buy-sell provisions contained in some shareholder, partnership, and similar agreements.

Shotgun buy-sell provisions are a blunt form of dispute resolution. They are a form of exit clause that may be invoked where a business relationship amongst shareholders, partners, joint venturers, etc., has deteriorated to the point where it becomes unlikely that they can continue to work amicably together. What is needed is a “business divorce.” And a shotgun clause is sometimes an easy way of achieving that.

Broadly stated, shotgun clauses allow an offeror (the person making the offer) to offer a specific price per share (sometimes referred to as the “strike price”) for the offeree’s (the person receiving the offer) shares in the business. The offeree then typically has a specific amount of time to elect to either: (1) sell their shares to the offeror at the strike price; or (2) buy the offeror’s shares at the strike price. If no election is made by the offeree during the time specified, many shotgun clauses will deem a specific election to have occurred. For example, a deemed election by the offeree to sell his or her shares to the offeror at the strike price specified in the offer.

Depending on the shotgun clause at issue, the strike price could be determined in several ways. For example, at fair-market value, through a specified valuation formula, or even arbitrarily.

To be sure, shotgun buy-sell clauses are draconian remedies because their effect is to involuntarily expel a shareholder from a company. It should not be surprisingly that the courts require strict compliance with their terms for any offer made thereunder to be enforceable.[1] 

Shotgun buy-sell offers that are ambiguous, qualified, or that equivocate will not meet this strict compliance standard.[2] Nor will those that are inconsistent with the commercially reasonable expectations of the parties, as set out in the underlying document in which the shotgun buy-sell clause is contained. For example, in Western Larch Ltd. v. Di Poce Management Ltd., 2013 ONCA 722, the Court of Appeal for Ontario found that a shotgun buy-sell offer (Alternative 1 in that case) that provided for the repayment of a partner’s debt over a period of four years in violation of a provision in the partnership agreement requiring the partnership to repay the debt “in full on closing” was invalid.  

While draconian, shotgun buy-sell offers are not oppressive per se. Yet, they may arguably be subject to attack under the statutory oppression remedy under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, depending on the circumstances in which they are invoked.

On the underlying motion for summary judgment in Western Larch Limited v. Di Poce Management Limited, 2012 ONSC 7014, Justice D.M. Brown (as he then was), found that the shotgun offer in that case was not oppressive because the plaintiffs had no reasonable expectation that they would have an ongoing role in the partnership or that their interest would be bought out at fair-market value rather than “a value” as set out in the underlying shotgun provision in that case. That finding was not at issue on appeal.[3]

Shotgun offers may also be imposed by the court as a remedy, as one of numerous remedies available to the court under the statutory oppression remedy. This is what occurred in D’Antonio v. Monaco, 2013 ONSC 5007.[4]

[1] Western Larch Ltd. v. Di Poce Management Ltd., 2013 ONCA 722 at para. 22.

[2] Ibid at para. 43, citing Trimac Ltd. v. C-I-L Inc., 1987 CanLII 3376 (AB QB), affirmed at 1987 ABCA 144. 

[3]  Western Larch at para. 32: “For completeness, I note that the appellants do not appeal the following claims: that the shotgun buy-sell provision could not be triggered unless “a partner became mentally unstable and erratic”, at paras. 125-35; for various breaches of fiduciary duty, at paras. 205-46; and for oppression under s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, at paras. 247-256.” (emphasis added).

[4] The imposition of this remedy does not appear to have been at issue on appeal: D’Antonio v. Monaco, 2015 ONCA 274 at para. 9.