What is a Shotgun Clause?

A shotgun clause refers to a type of exit strategy used in business partnership or used by shareholders. It is a buy-sell agreement that exist between partners which forces a partner to sell their stake in the business or shares and can also force them to buy out a stake or shares from the offering partner. Therefore, a shotgun clause can either force a partner or shareholder to sell their shares or buy out an offering partner. Oftentimes, a shotgun clause is included in shareholders agreement or business partnership as a way of resolving disputes that are likely to occur.

How Does a Shotgun Clause Work?

Usually, shotgun clauses are used in shareholders or partnership agreement between two people, for this clause to be used, both parties must have an equal stake in the agreement. When a shotgun clause is in place, a partner or shareholder can offer to buy out the offering of the other party at a specific price. In the case of shareholders, a shareholder can offer to buy their shares held by other partners at a certain price per share, the shareholders can either accept the offer of selling their shares or buy out the offering party or initial shareholder at a specific price. 

Shotgun Clause in Practice In reality, a shotgun clause is an exit provision included in shareholders agreement as a pricing model and for dispute settlements. Through the shotgun clause partners are guaranteed fair pricing. If a partner enacts the shotgun clause, he can offer to buy the shares of other partners at a specific price whereas the partners have the choice of accepting the offer or buy out the offering party at a specific price. In most cases, shotgun clauses are used when the business partnership is in distress or when one of the partners wants to take an exit from the partnership due to many factors. The execution of a shotgun clause comes with simplicity and fairness.

Shotgun Clause Counterpoint

Despite that shotgun clauses offer simplicity and fairness in pricing to investors, there are some criticisms against it. According to some practitioners, shotgun clauses end up allowing a partner with little or no value for the company to buy the company, once they have deeper pockets than other partners. Another criticism against shotgun clauses is that they are inefficient even when it comes to fair pricing and purchase.

Related Topics

• Business Entities (Intro)
• Why is studying business entities important?
• Considerations When Forming a Business Entity
• Holistic (Detailed) Overview of Setting Up a Business Entity
• What are Business Entities?
• What is a Closely-held vs Publicly-held Business?
• What are the main types of business entity?
  
• What are the primary characteristics of business entities?
• What is Creation of a business entity?
• Where to Form a Business
• Incorporating in Delaware
• Forming an LLC in Nevada or Wyoming
• Creating a Company Offshore
• Promoter
• Promoter Liability
• De Jure Corporation
• Ultra Vires
• Brassplate Company
• What is Maintenance of a business entity?
• What is Continuity of a business entity?
• Business Continuity Planning
• Buy Sell Agreements
• Shotgun Clause
• Winding Up
• Dissolving a Foreign Qualification
• What is the Ownership structure of a business entity?
• Joint Stock Company
• Parent Company
• Subsidiary Company
• Wholly-Owned Subsidiary
• Operating Subsidiary
  
• Holding Company
  
• State-Owned Enterprise
• Mutual Company
• Conglomerate
• What is Control of a business entity?
• What is Personal liability of owners of a business entity?
• Entity Theory
• Piercing the Corporate Veil
• What is Compensation of business owners?
• What is Taxation of a business entity?
• What is Sales & Use tax?
• What are payroll and self-employment taxes?
• What are the major characteristics of a Sole proprietorship?
• Uniform Partnership Act
• Uniform Limited Partnership Act
• Partnership Agreement
• At-Will Partnerships
• Responsibilities of Partners to the Partnership
• Silent Partner
• Funding the Partnership
• How are Partners Compensated
• Splitting Equity in an Industrial Partnership
• Terminating the Partnership
• Types of Partnerships
• What are the main characteristics of a General partnership?
• Tort Liability of General Partner
• What are the main characteristics of a Joint venture?
• What are the main characteristics of a Limited partnership?
• Family Limited Partnership
• Master Limited Partnership
• What are the main characteristics of a Limited liability partnership?
• What are the main characteristics of a Limited liability company?
• Forming an LLC
• Articles of Organization
• Operating Agreement or LLC Agreement
• Why You Need an LLC Agreement
• LLC Compensation of Members
• LLC Taxation
• Converting to an LLC
• What are the main characteristics of a Corporation
• Articles of Incorporation 
• What to include in the Articles of Incorporation
• Corporate Bylaws
• Exiting the Corporation
• Dissenter's Rights
• What are the requirements to be an S Corporation?
• Non-Profit Organization
• NonProfit Business Entities
• Private Foundation
• A Detailed Explanation of the Sole Proprietorship
• Taxation of Sole Proprietorship
• A Detailed Explanation of the General Partnership
• 50/50 Partnerships: Never a Good Idea
• Publicly-Traded Partnerships
• A Detailed Explanation of the Limited Liability Company
• A Detailed Explanation of the Corporation
• Keepwell Agreement (Letter of Comfort)
• Personal Service Corporation Definition
• A Detailed Explanation of the Non-Profit Entity
• Public Limited Company (UK)