What is this document?
A Buy-Sell Agreement, also known as a Shotgun Agreement or a Buyout Agreement, is an agreement between shareholders that enables the shareholders to end their relationship, and is especially useful when they can’t get along any more. The result is that one of the shareholders is bought out.
When would I use this document?
A Buy-Sell Agreement would be used when the shareholders can no longer work together and need to go their separate ways. It can be a stand-alone agreement, or can be included in a shareholders’ agreement.
Who signs this document?
A Buy-Sell Agreement is signed by the shareholders of the business.
More details about this document
When a shotgun clause is triggered, one shareholder will make an offer to another shareholder to purchase all of their shares. The offer will state the terms of what the offering shareholder is willing to pay for the other person’s shares. The other shareholder can either agree to sell all of the shares on those terms, or may choose instead to purchase all of the shares of the first shareholder for the same price per share. The first shareholder risks either having to buyout the second shareholder, or be bought out him/herself.
Regardless of who ends up buying the shares, at the end of the day one of the shareholders will be ‘bought out’. The clause usually requires the person triggering it to state explicitly that they are triggering the shotgun clause with their offer. It is called a ‘shotgun’ clause because once it is triggered there is no choice but to buy or be bought out. The downside to this clause is that if the first shareholder has enough money to buy out the second shareholder, but the second shareholder cannot afford to buy out the first shareholder, the second shareholder will have no choice but to sell for a potentially low price.
Parties can include a minimum price per share in the agreement. Shotgun clauses can be drafted to account for multiple shareholders as well.
What are the core elements of this document?
The core elements of a Buy-Sell Agreement include: Offer to Purchase, Revocability of Offer, Minimum Value of Offer, Restrictions/Quantum of Shares to be Acquired, Acceptance/Rejection of Shares to be Acquired, Time Limits for Acceptance of Terms, and Failure to Make Payments.
Related Documents
- Shareholders’ Agreement - agreement between shareholders that governs relationships between shareholders, including shareholder ‘exits’ from the corporation
- Share Purchase Agreement - agreement governing the sale of shares