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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.

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