If you have, or are planning to create, a corporation with more than one shareholder then it is a good idea to get a shareholder agreement in place. A shareholder agreement is a legally binding document that outlines the rights and responsibilities of the corporation’s shareholders and directors; think of it as a corporate nuptial agreement.
A shareholder agreement is helpful for everyday business operations because it makes explicit who can do what and how they need do it. Depending on the circumstances, shareholders or directors who attempt to act in a manner contrary to a shareholder agreement may be liable for any damages that arise from the unsanctioned conduct. But, shareholder agreements serve another function; they create mechanisms for resolving disputes between shareholders. One such mechanism is the ‘shotgun’ clause, which is typically invoked when each shareholder wants to run the corporation, but do not wish to do so together.
A shotgun clause, more formally known as a buy/sell agreement, stipulates that each shareholder has the right to offer to purchase the shares of other shareholder(s) at a specific price. Once this offer is made the other shareholder(s) must either sell their shares at that price or buy the offeror’s share at that price. In theory, the original offer will be a fair price since the offeror knows he may have to sell his shares for this amount. However, in practice shotgun clauses tend to be disadvantageous to the shareholders in weaker financial positions because such shareholders may not have the capital to buy the offeror’s shares, even if the price is below what the shares are worth.
To learn more concerning what shareholder agreement is right for you and your corporation, feel free to contact the lawyers at Stringam LLP.
Stephen C. Mogdan