Shot Gun Clause what it is how it works sample

What is the "Shotgun Clause"?

The "shotgun clause," also known as a "buy-sell agreement" or "shootout clause," is a provision often included in business partnerships or shareholder agreements. Its purpose is to provide a mechanism for the fair and efficient resolution of disputes among business owners when one party wants to sell their interest in the company. The shotgun clause allows one party to make an offer to buy the other party's shares, but with a twist that allows the other party to either accept the offer or counteroffer by buying the first party's shares at the same price.

Here's how a shotgun clause generally works:

1. Triggering Event: The clause is typically triggered when one business owner (shareholder or partner) decides they want to sell their interest in the company. This decision could be due to various reasons such as retirement, disagreement on business strategy, or personal reasons.

2. Offer to Sell: The party wishing to exit the business initiates the process by making an offer to sell their shares to the other party at a specified price per share. This offer sets the terms for the potential transaction.

3. Two Options for the Other Party:

• Option 1 (Acceptance): The other party can choose to accept the offer and buy the shares at the offered price.

• Option 2 (Counteroffer): Alternatively, the other party can reject the offer and counteroffer to buy the first party's shares at the same price per share.

1. Resolution: If the other party counteroffers, the initiating party is then faced with the decision to either accept the counteroffer or buy the counteroffering party's shares at the same price per share.

2. Fairness: The purpose of the shotgun clause is to provide a fair and balanced mechanism for resolving disputes related to the sale of ownership interests. It ensures that both parties have an opportunity to be a buyer and a seller, and it encourages parties to set a reasonable price for the shares.

Here's a simplified example:

• Alice and Bob each own 50% of a business.

• Alice triggers the shotgun clause, offering to sell her shares to Bob for $100,000.

• Bob has two options:

• Option 1 (Acceptance): Bob can accept and buy Alice's shares for $100,000.

• Option 2 (Counteroffer): Bob can reject and counteroffer to sell his shares to Alice for $100,000.

• If Bob counteroffers, Alice must decide whether to accept the counteroffer or buy Bob's shares for $100,000.

The shotgun clause provides a structured and negotiated way for business owners to exit a partnership without unnecessary conflict while ensuring a fair valuation of the business interests. The specific terms and details of a shotgun clause can vary based on the agreement between the parties.