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.

In the midst of a take-over battle between Russian-based Severstal Gold NV and Grand Cayman-based Endeavour Financial Corporation, Severstal asked the BC Securities Commission to compel TSX-listed Endeavour to comply with Canadian take-over bid requirements (Instrument MI-62-104 – Take-over Bids and Issuer Bids).

Pending that determination Severstal applied to the Executive Director to issue temporary order under section 161(2) of the Securities Act prohibiting Endeavour from trading Crew securities until a hearing was held to consider the issues raised by Severstal in its application.   The application was investigated quickly and 9 days later, the Executive Director issued a reply declining to intervene.

In last Thursday’s reasons,  the Securities Commission made short shrift of Severstal’s application to review that refusal, doing so both on procedural and substantive grounds.

Procedurally, the Commission applied Alberta and B.C.  law that the Executive Director’s discretion whether to issue such a temporary order is not subject to a review to the Commission under section 165(3) of the Securities Act.    It is not reviewable since the failure to make an order is not the same as a “decision” of the Executive Director which would be subject to statutory review.  Furthermore,  Severstal was held not to have standing to apply for a cease-trade order in that situation.

Although it could have simply dismissed Severstal’s application on procedural grounds, the Commission went one step further, in a move which is a caution to parties involved in a take-over battle not to use the Commission as a tool to manipulate a market battle without good reason.   The reasons underlying Severstal’s application were first, that recent Endeavour purchases in the marketplace were made with insider information; and second that having acquired more than 20% of the target company the purchases constituted a take-over triggering a regulatory process.  Severstal had itself announced a plan to make its own take-over bid at a price below what became the rising market price.

The Commission was obviously miffed with Severstal’s serious allegations of insider trading when it did not produce a shred of evidence to support it; the Commission expressed “concern” over that false allegation.    There had also been no ”take-over bid” triggering the Canadian regulatory process, since Endeavour’s purchases of Crew Gold stock were made offshore and not from sellers “any of whom is in the local jurisdiction”.

I view the Securities Commission’s willingness to expand its decision to cover substantive issues, and its rebuke over false inside trading allegations, as indicative of its disinclination to be used as a tool by which public companies may seek to use securities regulation to manipulate natural market forces.