When there is a shotgun clause in a shareholder agreement, each shareholder is empowered to force a share sale at a price set out in the offer. The recipient of the offer decides whether to buy or sell. When this kind of offer is made, disputes may result.
This article looks at a recent decision of the Court of Appeal for British Columbia, Blackmore Management Inc. v Carmanah Management Corporation, in which two shareholders made a shotgun offer but sought to revoke it within the contractual election period. When the third shareholder wanted to purchase their shares, the Court was called upon to decide whether the shotgun offer could be revoked in these circumstances.
What is a “shotgun offer”?
A shotgun clause is a provision of a shareholder agreement regarding the purchase of shares. The clause entitles each shareholder to force the sale of a share at a price and on the terms stipulated in its offer.
Once the shotgun offer is made by a shareholder, the recipient shareholder decides whether to buy or sell on the terms of the offer. The recipient has a specified amount of time, called the election period, in which to make their decision.
If there is a change of circumstances during the election period, this can cause problems for the shareholder that made the offer.
Two shareholders make shotgun offer to third shareholder
Three companies, Blackmore, Carmanah and Amphitrite, each owned one-third of First Light Technologies Limited. Carmanah and Amphitrite initiated negotiations to purchase Blackmore’s shares, but these did not succeed.
In January 2020, Carmanah and Amphitrite invoked the shotgun clause in the shareholder agreement. They offered to acquire Blackmore’s interest for $1,500,001 or to sell their interests for a total of $3,000,002. The election period was set to end on March 27, 2020.
Blackmore sought the production of financial documents to assess the offer and potentially obtain financing to purchase the shares. In February, it announced that it intended to secure financing and, in March, it sought an order freezing the time to make its election and an order that First Light Technologies deliver the accounting records.
The matter was set down for hearing on March 25, 2020. The parties agreed to suspend the time for Blackmore to make its election until the proceeding was heard, or later if the matter was not disposed of on March 25.
They then sought to revoke the shotgun offer
Due to the pandemic, the application was not heard on March 25, 2020. By June 2020, the parties became aware that First Light Technologies had increased in value by a “not insignificant” amount.
Carmanah and Amphitrite agreed to an August hearing date but then purported to revoke the shotgun offer. Their reason for revocation was that “both world events and [Blackmore’s] election to litigate this matter have fundamentally changed the circumstances” relating to the shotgun offer.
Following this, Blackmore formally elected to purchase the shares at the valuation stipulated in the shotgun offer. It sought a declaration that the offer was not revocable.
Court of Appeal finds the shotgun offer irrevocable
Justice of Appeal McKenzie examined the shareholder agreement to determine the objective intentions of the parties. Her Honour explained that the shotgun clause in this agreement referred to the offer as a “compulsory offer,” suggesting the recipient must choose either to buy or sell. It said the recipient was “entitled” to buy or sell, giving it an absolute right to elect within the election period.
Further, the clause said that if the recipient fails to make an election within 60 days, it is deemed to have accepted the offer to sell. This was consistent with the process needing to continue once it was initiated, rather than the shotgun offer merely being an offer to form a new contract (which would be capable of revocation).
This interpretation was supported by the commercial context of shotgun offers
Her Honour’s conclusion that the offer was irrevocable was supported by the surrounding circumstances and commercial context. For example, the commercial purpose of a shotgun clause is to provide a mechanism for shareholders to terminate the shareholder relationship by forcing a sale of one shareholder’s interest in the company. An interpretation that would allow the shotgun process to be unilaterally stopped once triggered is inconsistent with this objective.
Further, the shareholder making the offer decides the valuation as well as whether and when to invoke the shotgun clause. They must be assumed to have considered the risk of a change in financial circumstances before making the offer.
The subsequent agreement suspended the election period
Justice of Appeal McKenzie held that the agreement made in March 2020 to stop the running of the election period until Blackmore’s application had been disposed of had the effect of extending the period during which the shotgun offer could not be revoked.
Her Honour disagreed with Carmanah and Amphitrite’s position that the pandemic was an unforeseen event that frustrated performance of the agreement. The purpose of the agreement was to suspend the election period until the application was resolved; not only for “a matter of days.”
As a result, her Honour decided that Carmanah and Amphitrite were not entitled to revoke the shotgun offer and that Blackmore was entitled to purchase their shares in First Light Technologies in accordance with their offer.
Contact Meridian Law Group in Vancouver for Representation in Shareholder Disputes
Unresolved disagreements between shareholders can cause internal discord, disrupt business operations, and damage a company’s reputation. Many of these disputes require swift legal action to preserve stakeholder rights and protect the value of the business. Meridian Law Group’s experienced litigators provide practical strategies to resolve conflict as efficiently as possible and authoritatively advocate for clients when matters proceed to court.
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