When shareholders are in a dispute, one solution is to buyout the shares of one or more individuals.

Buyouts can occur if an agreement is reached, through a court order or under the terms of a shareholders agreement or similar contract.  The intention of a structured buyout is to address the grievance or deadlock by re-distributing the shares so that the business can continue to operate. The B.C. Business Corporations Act, under section 227(3), gives the court discretion to direct the company or another shareholder to purchase all of a shareholder’s shares in certain situations: see the Oppression Remedies section of this website for more information.

Court Directed Buyouts

When buyouts are directed by the courts, the court normally sets the purchase price based on the shares’ fair market value on the date the oppression claim was filed.  A buyout can also be ordered by the court when there is a deadlock between the Board members and the only other alternative would be to dissolve the company (see sections 324 and 227 of the Business Corporations Act).

Shotgun Clause

A shareholder buyout can occur as part of the shareholders agreement. A shotgun clause is a common exit clause used that will force either the offeror or the offeree to buy the other shareholder out of the company. Under a shotgun clause, Shareholder A triggers the shotgun clause by offering to buy all of Shareholder B’s shares. Shareholder B then has the choice to accept the offer as is or buy all of Shareholder A’s shares at the offered price. The timelines for acceptance are usually short.

Shotgun clauses are often complex and strategic; the price for the shares under a shotgun clause can either be pre-set in the shareholders agreement or left up to the shareholder making the offer. Shareholder A should consider making a fair offer; if it is too low, Shareholder B may have or could raise the funds to buy out Shareholder A. Alternatively, if Shareholder A has deep pockets and is more concerned with pushing Shareholder B out of the company, then a higher price may entice Shareholder B to accept.

A shotgun clause without a pre-set price works where both parties have the means to buy the other out. However, when only one party has the necessary funds, it can result in a disingenuous offer being made and a below market price set as a result.

Owner operated businesses can encounter another complication with shotgun buyout clauses when only one shareholder is capable of running the business.  Again, the shotgun clause would only work in the favour of the party that can run the business.  For this reason, a shotgun clause is not a one size fits all solution.

Other Types of Buyout Clauses

There are other types of buyout clauses that can appear in a shareholders agreement. The price can be pre-set, based on a formula usually driven by the financial statements or by an appraiser. While appraisals are more accurate, they can be more costly and the subject of litigation. The buyout can be triggered by events such as a default or death, or simply at the election of one of the shareholders. It is a good idea to discuss the buyout or exit clause with a legal advisor before entering into a shareholders agreement because this agreement will dictate how buyouts are governed.
