When minority shareholders in a corporation want to part ways with the company, they can face bleak prospects. Because the company’s stock is not publicly-traded, it can be difficult for the minority shareholder to sell his shares and walk away. Fortunately, a shotgun provision in the company’s shareholders agreement can provide relief in these situations.
Imagine the following scenario. ABC Corp. is a closely-held corporation with three shareholders, who are also employees: Andrews, Bentley, and Coburn. Each shareholder has 100 shares and each has an “c-level” officer position within the company.
Years pass and a froideur develops between Andrews and Bentley on the one hand and Coburn on the other. On management decisions and as a shareholder, Coburn is always outvoted by the other two. Coburn wants to get out of the company but, to do so, must find some Good Samaritan willing to purchase his shares in the company. Unfortunately, no one wants to sign up for finding himself in Coburn’s predicament and he cannot find a buyer.
If the ABC Corp. shareholders agreement had what is known as a shotgun provision, Coburn would have a way out of this nightmare scenario. A shotgun provision provides that, upon some triggering event (the author offers his sincere apology for this pun, which he desperately wished to avoid) the departing shareholder must either buy out the other shareholders or be bought out by them at the same price and on the same terms, whether he’s buying or selling. This pressures the parties toward the middle, preventing Andrews and Bentley from keeping Coburn chained to the company, while insulating Andrews and Bentley from having to pay Coburn a king’s ransom and cripple the company.
In this way, the shotgun provision allows the party or parties that most value control of the company to retain it and to do so without a protracted period of contentious negotiation or litigation. A shotgun provision is, accordingly, a valuable tool for shareholders in closely-held corporation.