Drawing a Parallel: Shareholders' Relationships and Marriage - Hoping for Long-Term but Facing Potential Separation.
However, unlike in marriage, a conflict among shareholders can threaten a company's profitability and sustainability. Swift resolution is crucial to prevent damage especially when internal conflict can seam unavoidable at times.
That’s what the shotgun clause is for – mitigating the risks that are inherent to any contractual relationship. Some may find it unusual, surprising and even reckless but all with find it effective and that’s what your shareholders’ agreement needs in term of dispute resolution.
Are you currently drafting your next shareholders’ agreement? Or are you facing a conflict with a business partner? In either case, the shotgun clause could be the solution!
Shareholders’ Agreement : Mere Formality or Critical Protection?
The shareholders' agreement is a contract that organizes the internal relations between the shareholders of a company.
Each shareholder makes a personal and financial contribution to the company, so it goes without saying that this investment must be adequately protected. In order to do so, any properly drafted shareholder agreement should contain certain essential clauses.
In theory, a corporation involves shareholders who are free to sell their shares. In order to prevent the arrival of unwanted third parties in the company's shareholding, it is essential to provide for a right of first refusal which will oblige the shareholder to offer his shares to the other shareholders of the company before offering them to third parties.
In case of refusal, the shareholder in question is free to sell his shares to the highest bidder.
Fundamental Clauses in a Shareholders’ Agreement
In their agreement it is in every shareholders’ interest to include a non-competition clause. It prevents a shareholder from contracting with competing companies while he or she is a shareholder or for a certain period of time after his or her departure. Like the non-competition clause in the workplace, the clause in commercial matters must be limited in terms of time, territory and the nature of the prohibited work.
The evaluation clause is a necessity and comes into play as a result of other clauses, notably the non-competition and first refusal clauses. When a shareholder is on the fence and forced to sell or buy shares, it is important to know how the value of the shares will be assessed.
If there is no clause providing for the valuation method, the shareholders will have to try to reach an agreement or take their dispute to the arbitrator, unnecessarily complicating an already tense departure of a partner. It is best to plan in advance how the securities will be valued, as differences in value may arise between the book value, the market value and the agreed value.
The insurance obligation is a fundamental protection in the case of death. Indeed, it obliges the shareholders to take out life insurance for the benefit of the other shareholders, allowing the latter to have the necessary liquidity to buy back the shares following the death.
Are you a shareholder of a small business? You should seriously consider drafting a unanimous shareholder agreement. This document allows you to limit the powers of the board of directors and to repatriate them to the shareholders, which is ideal in the case of a small shareholder base.
These are just the basic clauses that your shareholders' agreement should include! The more detailed and more precise your agreement is, the more it will protect the shareholders involved. It your lawyers to draft clauses that meet the needs of your corporation above all else.
Demystifying the Shotgun Clause : An Essential Component for any Successful Convention
Imagine a scene from the Wild West. At sunset, two cowboys face each other, guns at their hips, tension at its peak. Which one of them will shoot first and come out of this fight alive? That is the question. Without the gore of our western episode, that's how the Shotgun clause in a shareholders' agreement works.
It’s a way to expedite the process needed in order to achieve dispute resolution. Indeed, a shareholder dispute that drags on does not bode well for the company or the individuals involved. The Shotgun clause prevents such a disagreement from continuing to the detriment of the company's financial interests.
| Translated into legal language, such a clause applies as follows. Shareholder X offers to buy the shares of shareholder Y for $1000. Shareholder Y can either accept the offer or force shareholder X to buy back the shares at the offered price. Either way, one of the shareholders leaves at the end of the shotgun clause, but why provide for such a double or nothing? |
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Should you add a commercial arbitration clause to your agreement?
However, it is essential that the clause be drafted so that it benefits all shareholders, whether minority or majority, and not just a favored sub-group. Given the significant powers conferred by the Shotgun Clause, this group would have disproportionate powers compared to the others.
Is the Shotgun Clause more advantageous to a majority shareholder than a minority shareholder?
On its face, the Shotgun Clause is indeed more advantageous to majority shareholders. Since Goliath is always more intimidating than David, majority shareholders often have more cash than minority shareholders. If the clause is applied, it allows them to accept an offer from the minority shareholders knowing that they have the means to buy the shares at the stipulated price.
In the event that the asking price is exaggerated, the minority shareholders will not have the means to buy back the shares in question, which constitutes an additional protection for the majority shareholders.
How to make the Shotgun clause advantageous to the minority shareholder?
Make sure that the deadlines stipulated are long enough! As a minority shareholder, the clause is primarily drafted to allow you to exit the company without incurring losses. However, if you wish to buy back the shares offered, it is essential to provide for sufficiently long deadlines to give you time to find the necessary financing.
If you are a majority shareholder, allow for short time frames for your shotgun clause. If you are a majority shareholder, you should be inclined to draft a clause that provides for short deadlines in order to give the minority shareholder as little time as possible to obtain financing. In addition, you should clearly and strictly stipulate the method of payment to ensure a quick transfer of funds.
First, it is a faster process. Indeed, commercial arbitration involves much shorter delays than the courts and thus allows for a much quicker resolution of the dispute before a qualified professional.
Entrusting the resolution of the dispute to an arbitrator also reduces costs. Although there are legal and arbitration fees to be paid, it is a less expensive process than a lengthy trial before a judge.
Always remember that the courts are a matter of public justice! This means that you will be exposing your dispute to everyone, including your competitors, investors and customers.
This benefits no one. Arbitration being a private forum, it preserves the confidentiality of the conflict and the shareholders involved. The trust of your clients is therefore preserved and you avoid a "family squabble" that could harm your company.
Why is it necessary to include a clause to go to arbitration? Because arbitration must always be done on a consensual basis, meaning that a person or a shareholder must agree to give an arbitrator the power to decide a dispute.
JuriGo : Connecting you with Expert Commercial Lawyers
Don't leave the fate of your investments up to chance . Entrust your shareholders’ agreement to a team of seasoned business lawyers who will forge a formidable pact, complete with an unwavering 'shotgun clause.' With JuriGo to help connect you with specialized council, you'll face any challenge head-on, well-prepared, and confident.
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