A shotgun (or buy-sell) clause provides a mechanism whereby any shareholder can attempt to sell the shareholder's shares or buy the shares of any other shareholder. In a simple shotgun/buy-sell agreement, the triggering shareholder fixes the price per share for a purchase of another shareholder's shares, in a notice which is delivered to the other shareholders. This notice can be a notice of an offer to buy, or a notice of an offer to sell. In either case, the triggering shareholder makes the offer and fixes the price per share. The other shareholders and recipients of the offer to buy or sell can choose to buy the offered shares, or sell the shareholder's own shares at the price per share fixed by the offer.
A shotgun/buy-sell provision generally only works equitably where the parties have sufficient financial capacity to exercise a purchase under the shotgun. Where the parties are not of equal financial capacity, this can work an unfairness against the party of limited means. Some agreements provide a specific time delay before any shareholder can use the shotgun/buy-sell provision. In some shotgun/buy-sell provisions, a penalty clause is included. In the event the purchasing party fails to complete the share purchase in accordance with the procedural requirements of the applicable clause, a penalty is invoked to allow for the sale of the shares of the defaulting shareholder at a significant discount.
Rights of first refusal are frequently used in shareholder agreements and provide a shareholder with the right to purchase the shares of another shareholder who has received a written offer from an arms length third party to purchase that shareholder's shares. The purchase would be made on the same terms and conditions as set out in the arm's length offer to purchase. Although a right of first refusal may appear innocuous, it is a significant restriction on the right of any shareholder to dispose of his or her shares to a third party. In fact, it is very difficult to dispose of shares, subject to a right of first refusal, without actively and directly involving the shareholders who benefit from right of first refusal in the sale process. Seldom are third parties willing to wait on the sidelines to allow rights of first refusal to run their course.
A piggy-back clause is typically intended to protect the interests of a minority shareholder who does not have the financial ability to exercise a right of first refusal for the shares of a majority, or principal shareholder. The protection is predicated on the requirement that any offer to purchase the share interest of a majority shareholder must be made for the shares of the minority shareholder, at the same price per share, and on the same terms and conditions. The minority shareholder then has the option to sell or not to sell. Where the right of first refusal is included together with piggy-back clause, the right of first refusal may constitute an unnecessary restriction on the right of a majority shareholder to dispose of his or her shares.