In a recent decision,
Shotgun clauses are one of the most well-known share purchase mechanisms found in a
To understand why, it is important to know how a shotgun clause works. Let's imagine a scenario where a makeshift corporation,
While a simple mechanism at first glance, issues may arise where there is a change in circumstances between the time of the initial offer by Shareholder A and when Shareholder B decides how to proceed. We see an illustration of such a situation in Blackmore.
In Blackmore,
After failed attempts to negotiate BMI's exit from FLT,
The notice stipulated that BMI had 60 days to respond to the offer. When presented with the notice, BMI requested additional accounting records from FLT to help it secure financing. It filed a petition with the court, seeking an injunction to stop the 60-day clock from running until it obtained such records. Eventually, in
However, in a perfect storm of events, two important changes in circumstances occurred during the election period. Firstly, by the latter part of March, the courts suspended all in-person operations due to the COVID-19 pandemic causing the hearing of the application to be delayed and rescheduled for
Once aware of this turn of events,
The lower court found that the shotgun offer was revocable. The Court of Appeal reversed such finding and held that the shotgun offer was in fact irrevocable. It based its finding on the plain meaning of the words in the
In its analysis, the
The Court also looked at the surrounding circumstances and general commercial principles of contract formation. It concluded that both commercial reasonableness and the surrounding circumstances required the Court to interpret the clause as irrevocable within the election period.4
The Court explained that such clauses are usually invoked when shareholders wish to terminate their business relationship through a forced sale. Interpreting a shotgun offer as revocable, would go against such an objective of terminating the business relationship.5
The Court finally commented that an important feature of a shotgun mechanism is the underlying incentive for each party to make a fair offer based on the market value of the corporation. This fairness-incentive exists because the offeror does not know whether they will be buying or selling their shares at the end of the day. Allowing for a shotgun offer to be revocable would weaken this incentive:
[44] [...] To conclude that shotgun offers are revocable absent an agreement to that effect would weaken the incentive for shareholders to make a fair offer.6
Moreover, it would unfairly allow an undecided shareholder to test the waters knowing that they can change their mind should a new set of circumstances arise:
[47] [...] To conclude the shotgun mechanism could be unilaterally stopped after having been triggered would be to "rescue a party who later regrets contractual arrangements that were carefully designed and accepted"
[48] There is always a risk of market fluctuations during the election period. Parties can mitigate this risk by bargaining for a shorter election period. In this case the respondents agreed to a 60-day election period and further agreed to toll the election period. Sophisticated commercial parties must be taken to understand the market's risks and uncertainties when entering into contracts 7
The main takeaway from Blackmore is that a shareholder should evaluate and ensure that they understand the risks associated with initiating the shotgun mechanism. Subject to specific wording in the
Secondly, it is important to carefully consider whether shareholders actually want a standard shotgun clause in the
For example, if shareholders do want the shotgun offer to remain revocable during the election period, they must clearly provide for such flexibility it in the wording of the
Shotgun clauses are an excellent tool to resolve shareholder disputes relatively quickly, certainly much more quickly than normal litigation. However, they are a blunt instrument which brings significant risk that one of the shareholders could end up significantly "losing out".
Footnotes
1.
2. Blackmore at para 17.
3. Blackmore at para 18.
4]Blackmore at paras 41 and 42.
5. Blackmore at para 43.
6. Blackmore at para 44.
7. Blackmore at paras 47 and 48.
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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