Shotgun Agreements: Advantages and Disadvantages to Breaking Board Deadlock, Establishing Price and Offers

Recording of a 90-minute CLE video webinar with Q&A


Conducted on Thursday, July 22, 2021

Recorded event now available

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Course Materials

This CLE course will provide advice to counsel on how and when to utilize a shotgun buy-sell agreement. The panel will address the means to protect a closely-held business from the worst consequences of ownership and shareholder deadlock. Parties can establish a fair and equitable price to be determined in the future and what constitutes an irrevocable offer in these circumstances.

Description

In theory, shotgun provisions in shareholder and operating agreements provide an elegant and efficient buy-out solution when business owners can't agree and need to divorce. Such provisions are often used to break deadlocks between owners, providing that one party decides on a trigger event and the other party chooses whether to buy or sell at the price.

While shotgun provisions are not typical, they exist in many company governance documents and buy-sell agreements. There remain many advantages to the use of such provisions, such as the ease of understanding and negotiation of terms and the establishment of a baseline reasonable price. However, the disadvantages of these provisions are numerous and varied. The shotgun terms are established on assumptions in market predictions that may or may not hold. Further, shotgun provisions put minority shareholders at a disadvantage.

Corporate counsel should consider what revisions to a shotgun agreement that shareholders may view as most beneficial. Parties must consider the implications of a trigger event under all reasonably possible scenarios.

Listen as our expert panel discusses shotgun provisions, the best practices in structuring clear and enforceable buy-sell provisions with a reasonable triggering event, and what the advantages and disadvantages of continuing under this type of arrangement may be. The panel will address best practices for revising or replacing a current shotgun agreement.

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Outline

  1. Shotgun agreement requirements
    1. Agreement at a point in time
    2. Related to the transaction in future
    3. Define the trigger conditions
    4. Determine the price
  2. Advantages
    1. Easy to understand
    2. Easy to negotiate
    3. Inexpensive
    4. Pressure for a reasonable price
  3. Disadvantages
    1. Assumptions may not hold
    2. Minority shareholders may be at a disadvantage
    3. Uncertainty as to the outcome
  4. Best practices to revise or replace shotgun provisions

Benefits

The panel will review these and other important topics:

  • What constitutes a valid and enforceable shotgun agreement?
  • How does a shotgun agreement vary from other types of buy-sell valuation provisions?
  • What are the advantages and disadvantages of utilizing a shotgun agreement?
  • What are the best practices for revising or replacing a shotgun agreement?

Faculty

Mahler, Peter
Peter A. Mahler

Partner
Farrell Fritz

Mr. Mahler’s litigation practice concentrates on corporate dissolution proceedings, contested stock valuations,...  |  Read More

Sluka, Peter
Peter J. Sluka

Attorney
Farrell Fritz

Mr. Sluka represents a broad range of individuals and entities in all phases of complex commercial litigation,...  |  Read More

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