Many privately owned businesses have more than one owner. This
can be beneficial to a business, but it also poses its own
problems. Sometimes one or more of the parties realizes that the
partnership is not working which leads to dissention and conflict.
What options are there for individuals facing this scenario?
If the partners had entered into a shareholder agreement, that
agreement would likely contain a provision specifically designed
for partnership disputes. This provision is commonly called the
"shotgun clause". The legal term for this provision is
"compulsory buy out" and it is intended as a means of
separating shareholders who are not getting along. The shotgun
clause can be an effective way of avoiding litigation and providing
a clean split between the warring parties.
How does the shotgun clause work? Generally speaking, it
provides that one shareholder may make an offer to buy the other
shareholder's interest at a price set by the shareholder making
the offer. However, the interesting twist is that having made the
offer to buy, that shareholder is also deemed to have offered to
sell his interest at the same price and on the same terms as the
offer to buy. So it is left up to the shareholder receiving the
offer to determine whether or not he wants to sell his interest or
whether he wants to purchase the interest of the other shareholder.
This has the effect of making the offering shareholder think
carefully about his price. If he makes a lowball offer, he may end
up being bought out at that low price!
Normally, the shotgun clause will provide for time frames and
procedures for completing the transaction. Naturally, the details
will all depend on the wording of the shareholder agreement. In
addition, if there are more than two shareholders, the shareholder
agreement will normally state that only one shotgun may be fired at
a time. In other words, the other shareholders have to sit on the
sidelines to see who wins the duel.
There are a couple of things that you should keep in mind when
considering a shotgun clause. If the ownership is not 50/50, a
shotgun clause may not be appropriate. This is because whatever the
price, the minority will have to come up with a lot more money to
buy out the majority than the majority will have to come up with to
buy out the minority.
Furthermore, if one party has more financial wherewithal than
the other, that can create inequalities in power. The shareholder
with more money may bid low if he thinks the other shareholder
cannot raise the funds to buy.
Finally, if there is more than one shareholder, the shotgun
clause should include a "piggy back" right, which will
prevent the winner of the duel from diluting the interests of the
shareholders that are sitting on the sidelines. For example, absent
a piggy back right, if there were three shareholders the winner of
the duel would end up with 2/3 interest. The piggy back right would
have allowed the shareholder watching the duel to get his pro-rata
percentage of the spoils, thereby leaving two shareholders with 50%
each. You should check your shareholder agreement to see if it
covers these points.
What if there is no shareholder agreement and no shotgun clause?
Sometimes it is possible to implement a "non-binding"
shotgun procedure. In effect, the shareholder wishing to separate
makes a shotgun offer, but acknowledges that it is not binding. The
same thought process would be carried out in determining what the
price should be, given that it is both an offer to buy and an offer
If you are going to fire the shotgun, you need to think
carefully about how to do it. In my next blog post, I will discuss
what interesting things actually can happen when the shotgun is
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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