A shotgun clause (or Texas Shootout Clause) is an art term, not a legal term. This is a special kind of outgoing provision that can be included in shareholder agreements, and may be commonly referred to as a buy-sell agreement. The gun clause allows shareholders to offer a specific price per share for another shareholder's share; the other shareholder must accept the offer or buy the shareholder's share of the offer at that price per share.
Video Shotgun clause
Discussion
Typically, an exit clause is triggered in a situation where the business partnership has deteriorated greatly, and so the situation is often equated with divorce. In the same way that protracted battles between separated couples can often leave children with emotional damage, so a business can be marred by a protracted battle between its owners. For this reason, experts in this field emphasize the importance of entering an exit clause in a company shareholder agreement to minimize the negative impact of business divorce. Like prenuptial agreements, it is important to establish an initial exit clause in a business relationship when interests are aligned and partners still like each other.
The gun clause protects the interests of both or all parties irrespective of their share in the company. If either party decides to trigger such a clause, it is in their best interest to make a fair offer well considered - because if they make a low bid, their partner (s) may increase the resources to change their bidding, their return offer will definitely receive.
Maps Shotgun clause
Process
Shareholder who triggers a clause bid to buy shares of another party at a certain price per share. Other shareholders must accept the offer and sell their shares, or buy shareholder shares that are triggering at the same price. Alternatively, clauses may be arranged in such a way that the triggering shareholder triggers offers to sell their shares at a specific price per share, and other shareholders may then accept the offer or sell the shares to the triggering shareholder at a set price.
The timeline is generally very short, although there are no hard and fast rules. It is not unusual to have 20 to 40 days to choose to sell or buy, and 20 to 40 more days to close. If the recipient does not respond within the specified time period, the offer is deemed to have been received.
Rationale
This clause is most applicable when both partners want to run a company, but not together, and a friendly purchase can not be achieved. It serves as a kind of last resort to resolve this dispute, while also helping to ensure that a fair price is offered. When it triggers a rifle clause, the bidding partner does not know whether they will end up buying or selling their shares, so individuals should - in theory - choose the price they will find acceptable in both outcomes, thus preventing over- or under-large-.
Potential Problems
A large number of strategies go into how and when to trigger a rifle clause with offering shareholders have an incentive to guess the ability of other shareholders to finance purchases. If a person is financially limited, or can not run his own company, then others can trigger clauses and offer low prices for stocks, gambling that their spouses will have no choice but to accept. In this sense, the gun clause supports shareholders with stronger cash resources, and encourages shareholders to pull the trigger when the other shareholder (s) is weak. This problem is compounded by the fact that obtaining financing from banks is difficult in this situation, due to the very short time schedule of the rifle schedule. Private equity firms and venture capital firms that provide funding for this situation can help match the playing field (see Financing section below), although the numbers are limited.
The gun clause is also biased against shareholders with a greater ability to run the company itself. A partner capable of running his own business will be able to offer a lower price than a partner who can not. For example, if one shareholder becomes disabled or severely ill, they may not be able to manage the company. Other shareholders may exploit the situation by triggering a low-value rifle clause, knowing that the other shareholders will not be able to afford it.
Financing
Rifle clauses tend to benefit people with available cash. Once the clause of the rifle is triggered, shareholders can often have difficulty obtaining traditional financing to buy other shareholders' shares, due in large part to the very short time of the transaction. Traditional bank financing commitments usually take too long to acquire, and lenders often avoid situations where management conflicts tend to disrupt business. This means that owners who are facing a fired rifle clause are often forced to rely on their own resources if they want to parry purchased. However, there are some private equity firms and venture capital firms that specialize in providing capital for rifle situations.
Economy
In academia, it has been argued that, under certain circumstances, these clauses are not economically efficient because the most valued partner of the company is not the one who ends up buying the company. De Frutos and Kittsteiner suggest in their paper that in order to ensure efficient results, there should be no contractual obligations for the party that triggers a clause to mention the price. Instead, they advocate including in a clause termination agreement stating that the parties will negotiate for the right to be the person who chooses whether to buy or sell at a price determined by another partner. They suggest that this negotiation takes the form of a rising auction in which shareholders bid the right not to set price per share. Each partner raises its bid constantly, but each partner can quit the auction at any time. The party who stops being the person who has to propose the price per share, but the person receives payment from another partner equal to the bid on which the auction ends.
References
- Cotter, John; "Shotgun Fund is looking for a bulletproof investment"; Business Journal of Toronto; Vol 1 No. 12, July 9, 2001.
- Middlemiss, Jim; "Fund turns out the lights of the partnership dispute"; Weekly Lawyers; June 21, 2002; http://www.shotgunfund.com/news6-partnership-dispute.htm.
- The Shotgun Fund, [1], October 27, 2006.
- deFrutos, Mary and Kittensteiner, Thomas; "Effective dissolution of partnership under" buy-sell "clause; ideas.repec.org, October 19, 2004.
- Middlemiss, Jim; "Shotgun Showdown" Financial Post, October 6, 2003. http://www.knowpreneur.net/resources/articles/fpost100603.pdf
Source of the article : Wikipedia
0 Comments