Be careful before you pull the trigger – this is the main takeaway from the recent decision of Blackmore Management Inc. v. Carmanah Management Corporation, in which the British Columbia Court of Appeal (BCCA) concluded that an "offer" made pursuant to a standard shotgun clause in a shareholders' agreement could not be unilaterally revoked.
Background
The respondent shareholders (Carmanah and Amphitrite; together, the Respondents) elected to invoke the shotgun clause in their shareholders' agreement. Pursuant to the clause, the Respondents delivered a "compulsory offer" to the other shareholder (Blackmore), who then had sixty days to elect whether to sell its shares to the Respondents or purchase the Respondents' shares at a valuation stipulated in the shotgun offer.
Blackmore filed a petition to freeze the election period until certain financial information was disclosed. The parties ultimately agreed to freeze the election period until the petition was heard, the hearing of which was then delayed due to the COVID-19 pandemic.
During this period, the company's value increased. As a result, some four months after the shotgun offer had been delivered, the Respondents wrote to Blackmore purporting to revoke their shotgun offer. A month later, Blackmore delivered a notice advising that it elected to buy-out the Respondents' shares.
The B.C. Supreme Court Decision
The petition judge held that the shotgun offer was revocable. The judge relied on the general principle of contract law that "an offer to contract can be revoked prior to acceptance unless the parties have specifically agreed otherwise".
The B.C. Court of Appeal Decision
The BCCA overturned the lower court's decision, finding that the shotgun offer could not be revoked.
The Court noted that a shotgun offer was not an offer to enter into a new contract, but rather the exercise of an existing contractual buy-out process. Thus, the general principles of offer and acceptance did not apply. Rather, the shotgun process was governed by the terms of the shotgun clause in the shareholders agreement. It found that the plain meaning of the shotgun clause (i.e., the fact that a recipient could elect to buy or sell within sixty days) reflected that such a process, once triggered, could not be revoked.
The Court also put great emphasis on the commercial purpose of a shotgun clause. In particular, the Court noted that:
- A shotgun clause is intended to be a mechanism to "terminate the shareholder relationship by forcing a sale" and that "an interpretation that would allow the shotgun process to be unilaterally stopped once triggered is inconsistent with this objective."
- The fairness of a shotgun clause, in which the instigator choses the sale price, depends on the possibility that the instigator will be forced to sell their shares at the offered price. To conclude that such an offer was revocable would "weaken the incentive for shareholders to make a fair offer". It would allow a shareholder to make an offer "at a below-market rate and revoke the offer if it became apparent that the recipient shareholder intended to elect to buy".
Conclusions
While each shotgun clause must be considered based on its specific terms, this decision suggests that, absent clear language to the contrary, a shotgun offer will likely not be revokable. Therefore, parties should take care in considering both whether to trigger the shotgun clause and what valuation to select.
In addition, if drafting a shotgun clause that will not be revocable, parties should also consider the length of notice period, knowing that a longer period brings increased risks that the market will fluctuate while the offer is outstanding.
Finally, the issue at hand could potentially have been solved through contractual drafting. Consider, when agreeing to a delay to the shotgun period, whether the parties should consider adding conditions to such agreement, such as a re-evaluation of the purchase price if the delay is significant or if material changes to the business occur during such delay period.
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.
