By John W. Lee
As a child, I loved the old western shows where the two cowboys had a dispute over some land, a woman, or some perceived slight; and a challenge to a duel was offered up. Typically the two cowboys would end up on the dusty street at high noon and one would walk away a hero and the other would leave in a pine box. Either way, for good or bad, the dispute was settled.
Today in Shareholder agreements there is a similar situation; it is called the “Shot Gun Clause.” The Shot Gun Clause permits one share holder, the Offering Shareholder, to offer to purchase the shares of stock of another shareholder at specific price per share. The shareholder then must either accept the offer to sell his stock, or he must purchase the Offering Shareholder’s shares for the offering price. Either way, one of the shareholders is out of the company.
At first glance this may seem fair. It reminds me of when I was a kid and my brothers would fight over who got the last piece of cake. Mom would say okay, one of you cuts the cake and the other chooses the piece. When that happens, and you are the one cutting the cake, you make sure you are cutting it a close to even as possible because you know your greedy bother is going to pick the bigger piece.
In the case of the feuding shareholders once the offer is made, the shareholder receiving the offer must ether sell his shares or buy the offering shareholders shares for the offering price. Seems fair right? If this crazy shareholder just offered you $20.00 a share for your stock, then you can either sell, or buy his for $20.00 a share, seems fair?
What if you are the one receiving the offer to buy your 100 shares under the shot gun clause? You now are compelled to sell all of your shares, or buy all of the Offering Shareholders shares for the same price. What if he has 1000 shares? That means he can offer you $2,000.00 to buy you out, and the only way you can avoid being bought out is by offering to buy his shares for $20,000.00. Either way, one of you is gone, but you have to pay ten times as much as he does to stay.
Shot gun clauses are not uncommon in shareholder agreements and they tend to favor shareholders that are wealthy or majority shareholders with more stock. If you are a minority shareholder, be careful with signing a shareholder agreement that has a shot gun clause or you might find yourself back in the wild, wild, west.
This may be considered advertising material.