last blog post, I explained how the shotgun clause can be used
to separate shareholders that are no longer 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 their 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 they want to sell their interest
or buy the interest of the other shareholder. This has the effect
of making the offering shareholder think carefully about the price.
If they make a lowball offer, they may end up being bought out at
that low price!
Normally, the shotgun clause will stipulate time frames and
procedures for completing the transaction, depending on the wording
of the shareholder agreement that the parties signed. Once the
shotgun clause has been triggered, the time frames will have to be
observed. Some shareholder agreements provide for a total time
frame of about 45 days to complete the process and others provide
for longer terms such as 90 days. I find that once a shareholder
has decided to trigger the shotgun clause, the shareholder normally
wants to shorten the time frame to get the process over with. This
is understandable, but not advisable as a shareholder's failure
to comply with the terms of the shotgun clause may invalidate the
shotgun clause or the offer.
How do you actually trigger the shotgun clause? This is done
with a shotgun offer that should be drafted by your lawyer. As
noted above, it must comply with the terms of the shareholder
agreement in order to be effective. Often, I find that the
shareholder making the shotgun offer wants to add or delete terms
for the transaction. However, the courts have been fairly clear
that the offer must not vary from the shareholder agreement. For
example, a term amending the restrictive covenant contained in the
shareholder agreement cannot be included in the shotgun offer. The
terms of the purchase and sale in the shotgun offer should relate
only to those terms and conditions that are necessary to completely
sever the relationship between the parties and the company.
If you have fired the shotgun or are contemplating firing the
shotgun, you have to make sure that the offer is delivered to the
other shareholder in strict compliance with the shareholder
agreement. This is important because you want to ensure that the
time periods set out in the shareholder agreement run when you
expect them to. You will have to calculate the key dates and then
wait for the other shareholder to make their move. The first key
date is the day that the other shareholder has to decide to either
sell their interest or buy your interest. If the other shareholder
does not respond on that date, then by default they will have opted
to sell their interest in the business to you at the price you set.
Then there will be a time period to close the transaction.
What should you do during the time periods set out in the
shotgun procedure? Since you don't know whether you will be
buying or selling, you should immediately commence some due
diligence on the company. If you buy the business from your
partner, you need to know exactly what you are getting. Sometimes
there are hidden problems that you should find out about before the
offer is accepted and you end up with the company. The same applies
if the shotgun has been turned on you. In that case you should
investigate any actions your partner may have taken without your
When a shotgun clause is triggered it is a very stressful time
for both parties. However, with good advice you can come out ahead.
There are a lot of considerations to be aware of if you wish to
trigger a shotgun, or if it has been triggered on you. You need
advice from a lawyer who has experience with these situations.
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.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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