What is hammer clause and how it works sample
- Abhilasha Sharma
- Feb 13, 2024
- 3 min read
Updated: Mar 8, 2024
What is a hammer clause?
A "hammer clause," also known as a "shoot-out" or "co-sale" clause, is a provision often found in buy-sell agreements, particularly in the context of shareholder agreements or partnership agreements. This clause defines the terms under which one party can force another to sell their shares or ownership interest.
How "Hammer" clause work?
The term "hammer clause" is used because it essentially allows one party to force the other's hand in a sale situation.
Here's how a hammer clause generally works:
Triggering Event: Initially, there is a triggering event. For example, The hammer clause is typically triggered when one party (the "initiating party") receives an offer from a third party to purchase their shares or ownership interest.
Notice to Other Party: One party (initiating party) needs to notify the other party(non-initiating party) of the triggering event and their intentions related to the triggering event, as soon as possible. For example, upon receiving the external offer, the initiating party must notify the other party (the "non-initiating party") of the offer and express their intention to sell their shares at the offered price.
Options for the Non-Initiating Party: Generally the non-initiating parties to choose what is best for them. For example, here two following options are possible:
a.Option 1 (Buyer): The non-initiating party can choose to purchase the shares at the same offered price.
b.Option 2 (Seller): If the non-initiating party declines to purchase the shares, they must consent to the sale to the third party at the offered price.
Note: Sale at Offered Price: If the non-initiating party chooses not to buy the shares at the offered price, the initiating party is then free to proceed with the sale to the third party at the initially offered terms.
Sample of "Hammer" clause:
Here's a simplified example of a hammer clause:
"Hammer Clause: In the event that either party receives a bona fide offer from an unrelated third party to purchase their shares in the company, the receiving party must notify the other party of the offer. The non-receiving party shall have the option to either purchase the shares at the offered price or consent to the sale of the shares to the third party at the offered terms."
In this example:
"Hammer Clause" is the title of the provision.
The clause outlines the triggering event (receiving an offer from a third party).
The non-receiving party has the option to either buy the shares or consent to the sale at the offered price.
Hammer clauses are designed to provide a mechanism for resolving disputes over the valuation of shares and ensuring that shareholders or partners have the right of first refusal in the event of a third-party offer. It can be a useful tool for maintaining control over ownership changes and avoiding unwanted third-party involvement in the ownership structure.
Hammer clauses are often included in the business insurance contract as a provision. So if and when you are sued and you deny to accept the pre-approved settlement offer. Your insurance party can force you into a very ugly situation by making you pay for the court fees. As hammer clauses in the insurance contracts often come with provisions where the court fees get split between the defendant and plaintiff in the following ratio:
A.100:0 Hammer clause(softer hammer clause)
B. 80:20 Hammer clause
C. 50:50 Hammer clause
Reference:
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