In Western Larch Limited v Di Poce Management Limited1, the Court of Appeal for Ontario recently heard an appeal from a case in which partial summary judgment was granted in a commercial dispute involving the exercise of a shotgun clause.
Shotgun clauses, sometimes called "buy-sell provisions," are a type of provision that may be included in a shareholders' agreement that permits a shareholder to offer a specific price per share for the other shareholders' shares. The other shareholders must then either accept the offer or buy the offering shareholder's shares at that price. Whether initiating or responding to an exercised shotgun clause, the stakes are often high when a shotgun is triggered and time is often of the essence.
In Western Larch, five corporations involved in manufacturing and distributing wood products were parties to a partnership agreement that contained a shotgun clause. One of the shareholder partners died, triggering the other partners' obligation to buy out his company's interest in the partnership. However, all of the remaining partners except Western Larch wanted the late partner's company to remain in the partnership. The remaining partners decided to exercise their shotgun rights, and delivered a buy-sell offer to Western Larch.
The shotgun provision
The shotgun provision contained, inter alia, two alternatives for repaying the partnership debt on exit. The first alternative required the partnership to repay its debt to the exiting partner in full on closing. The second provided that half of the debt was to be paid on closing, with the balance paid over four years with interest. Additionally, the clause provided that if the party subject to its exercise did not select between these alternatives, it would be deemed to have chosen the latter.
Upon receipt of the buy-sell offer, Western Larch issued a statement of claim attacking the validity of the clause, and moved unsuccessfully for an injunction to restrain the respondent majority partners from implementing the buy-sell offer. The majority partners acquired Western Larch's interest in the partnership, in accordance with a deemed acceptance of repayment of half of the remaining partnership debt over a four-year period with interest.
Western Larch argued that the buy-sell offer did not comply strictly with the requirements found in the partnership agreement, and asked the court to find that the majority partner's buy-sell offer was invalid for a number of reasons. Its chief complaint centered on the valuation used by the offerors, specifically, that it was not based on market value and did not reflect its interest in the partnership.
Decision of the Commercial List
The lower court held that a non-compliant shotgun buy-sell offer is an "ordinary, and therefore, prima facie, legally valid, offer to buy or to sell, but it lacks enforceability for shotgun purposes." However, the motion judge concluded there was no requirement in the partnership agreement that the valuation used in the shotgun offer be based on market value.
Regarding Western Larch's other complaints, the motion judge set three of the issues for trial, and dismissed the rest on summary judgment. Notably, the court found there to be a genuine issue for trial over whether or not Western Larch suffered damage due to not being paid its partnership debt in full on closing. Western Larch appealed on the grounds that the motion judge misapplied the meaning of the "strict compliance" requirement with the terms of the partnership agreement.
Decision of the Court of Appeal
The Court of Appeal for Ontario dismissed Western Larch's appeal, and, in so doing, provided valuable guidance on the interpretation and enforcement of shotgun clauses. The court noted that shotgun clauses operate to involuntarily expel a party from what is, usually, a viable business venture. The severity of this result has led some courts to describe this as a "draconian" remedy, and this is why the law requires shotgun offers to comply strictly with the provision in the authorizing agreement. The court cited with approval the Alberta Court of Queen's Bench's finding that: "A shotgun buy-sell is strong medicine. One takes it strictly in accordance with the prescription or not at all."3
In concluding that the shotgun offer in this case complied with the terms of the partnership agreement, and was thus enforceable, the court makes two important findings. First, the partners could have included a provision requiring the valuation specified in a buy-sell offer to be based on fair market value. Second, the partners could have included a provision prohibiting partners from combining to oust another partner.
Ultimately, the court affirmed that it is not its role to "rescue a party who later regrets contractual arrangements that were carefully designed and accepted."4
The decision in Western Larch thus serves as an important reminder for parties to carefully consider, and carefully draft, shotgun provisions, especially given that failure to do so could result in an involuntary exit from their business.
12013 ONCA 722 [Western Larch].
2 Western Larch at para 18.
3 Trimac Ltd v C-I-L Inc (1987), 52 Alta LR (2d) 263 at para 29 (QB).
4 Western Larch at para 46.
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