SHOTGUN! You Should Know This Before Triggering A Buy-Sell Provision

There are important lessons in a recent Ontario Court of Appeal decision examining shotgun buy-sell provisions, and in particular, the enforceability of a buy-sell offer that does not perfectly comply with the terms and conditions of the shotgun provision.

Unanimous shareholder agreements, partnership agreements, and joint venture agreements often contain what is commonly known as a "shotgun buy-sell provision", which provides a mechanism for involuntarily expelling one or more parties from the business venture when the business relationship between them sours.

Briefly, a typical shotgun mechanism works as follows:

the offeror triggers the provision by concurrently making both an offer to buy the offeree's interest in the business venture and an offer to sell its own interest to the offeree; the offeree must decide whether to buy out the offeror, or to sell its interest to the offeror, at the price specified in the buy-sell offer; and if the offeree does not respond by the date in the buy-sell offer, then the offeror may force the offeree to sell its interests to the offeror. Assuming the parties have similar financial capabilities, a shotgun provision tends to ensure that the offered price is fair because the offeror selects a price at which it would be willing to both buy and sell the interests in the business venture.

Western Larch

In Western Larch Limited v. Di Poce Management Limited, 2013 ONCA 722, three partners relying on the shotgun buy-sell provision in their partnership agreement delivered a joint buy-sell offer to another partner.

The buy-sell offer contained two alternatives, either one of which could have been accepted by the offeree partner. The alternatives differed in their treatment of debt owed by the partnership to the selling partner. One alternative complied with the terms of the partnership agreement and contemplated the repayment of the debt in full on closing. The other alternative provided for repayment of half of the debt on closing, and the balance over four years together with interest. The buy-sell offer deemed the offeree to have chosen to sell its interests in accordance with the non-compliant alternative if the offeree did not elect to purchase the interests of the offerors.

The offeree unsuccessfully tried to find financing so that it could buy out the interests of the offerors in accordance with the buy-sell offer. The offeree only disputed the validity of the buy-sell offer days before the deadline for...