The suitcase full of cash: When shotgun clauses backfire

A lawyer friend once told me about a shareholder dispute that’s stuck with me ever since. A man and his ex-wife were business partners. Things had soured, and he wanted her out. So, he used the shotgun clause in their shareholder agreement to make a lowball offer… One he was certain she couldn’t afford to match.

Shotgun clauses give you a limited time to respond and close; in this case, 30 days. Not much time to pull together significant capital, especially when someone’s betting you can’t. He thought he had her cornered.

What he didn’t expect was this: she flew to her homeland of China, rallied her family, and came back with a suitcase full of cash. She pushed it across the table and took the business from him. 

Wild! Oh, to be a fly on a wall…

Shotgun clauses are one of the most talked-about mechanisms in shareholder agreements, and for good reason. They’re designed to break deadlocks when partners can’t stand being in business together anymore. 

One party makes an offer to buy the other out at a specific price. The other party has two choices: accept the offer or flip it and buy out the other person at the same exact price (i.e., turning the shotgun around).

It sounds fair in theory, but in practice… It’s a huge gamble. The problem is leverage. 

If there’s a financial imbalance between partners (and there usually is), the wealthier party can exploit the clause. They can lowball, knowing the other person likely can’t come up with the funds to turn the tables.

Except when they can.

I’m not a big fan of standard shotgun clauses for this exact reason. They work when both parties are on relatively equal financial footing. But when one partner has access to capital, and the other doesn’t (or when you assume they don’t), it becomes a weapon. And sometimes, that weapon gets turned around on you. 

Admittedly, there have been many occasions in my career where a shotgun would have been helpful, so when I think one makes sense, I often try to build in controls to limit when and how a shotgun can be used (i.e. triggering events, valuation limitations, ADR requirements, etc.).

If you’re drafting a shareholder agreement, think carefully about whether a shotgun clause is right for your situation. Because once you pull that trigger, you’d better be prepared for whatever comes next.

What are your feelings on shotgun clauses?

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About Outsiders Law

At Outsiders Law, we help business partners navigate the complex realities of growth, transition, and change with practical, plain-language legal solutions. If you’d like to learn more about shareholder agreements or have your existing one reviewed, contact us for a consultation.