Jordan joined Kornfeld LLP as an associate in June 2011, after completing his articles with the firm. His practice covers the areas of general corporate commercial law with an emphasis on mergers, acquisitions, divestitures, corporate governance and financing, as well as banking and insolvency law, particularly acting for lenders in foreclosure and bankruptcy matters.
Zeubear Investments Ltd. v. Magi Seal Corporation 2010 ONCA 825 (December 7, 2010), a decision of the Ontario Court of Appeal, is a reminder to pay close attention to the potentially different interpretations in “shotgun clauses”.
Shotgun clauses are generally inserted in shareholders’ agreements as an exit provision. One party offers to purchase the shares of the other shareholders at the offered price per share and the others then have the option to either sell their shares or purchase the offering party’s shares at the specified price.
These buy-sell provisions in shareholders’ agreements are often useful tools to aid in the resolution of disputes among shareholders.
In Zeubear, the case turned on whether the purchase price was payable entirely in cash upon closing.
The “Harris Group”, owners of 60% of the shares in the subject corporations, triggered the buy-sell provisions of the shareholders’ agreements by providing notice to Geddes, the owner of 40% of the shares, offering to purchase Geddes’ shares for a certain price, payable in full on completion of the sale.
The notice also provided that if Geddes opted to purchase Harris Group’s shares instead, Geddes would have to pay the entire price for Harris Group’s shares on closing.
The shotgun clauses in question parallel the terms of a typical buy-sell offer:
Minimum Terms. Notwithstanding any other provision hereof … the Terms shall be deemed to provide, inter alia, that :
…(c) payment of the Purchase Price for all of the Shares to be purchased pursuant to this section shall be made by delivering on completion:
(i) at least 50.0% of the Purchase Price in cash or by certified cheque or bank draft; and
(ii) a promissory note for the balance of the Purchase Price …
After receiving the notice, Geddes purported to accept the offer to purchase Harris Group’s shares but the acceptance provided that the purchase price would be payable as to 50% of the purchase price upon closing and the remainder by delivery of a promissory note.
The decision turned on whether the provisions of the shotgun clause set out minimum payment terms for the buy-sell offer, or instead set out the actual terms to form part of the offer.
The Court of Appeal, in deciding that the latter interpretation was the correct one, focused on the wording of the clauses, which stipulated that “the Terms [of any offer] shall be deemed to provide …”. Consequently, the relevant clauses in the shareholders’ agreements provided specific terms which were required to form part of any buy-sell offers.
Geddes therefore had the option of accepting Harris Group’s offer to sell upon the payment provisions set out in the relevant clauses in the shareholders’ agreements. Harris Group’s offers were deemed to include the payment terms set out in the relevant provision and Geddes’ acceptance was valid.
Given that the relevant clauses were titled “minimum terms” and the payment provisions required that “at least” 50% of the purchase price be paid upon closing, it may very well have been the intention of the drafter (and perhaps at least some of the parties) that the payment provisions establish a minimum cash threshold for any buy-sell offer, rather than express terms for each offer. This was likely a very surprising outcome to Harris Group, given its notice to buy at 100% cash.
It is critical for parties to shotgun clauses in shareholders’ agreements to consider carefully the language used to reflect their intentions. Otherwise, at the end of the day one party may be left in a very different position than it had intended.