Shotgun Clause Explained: 2025 Guide, Costs, and Key Considerations

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What Is a Shotgun Clause in 2024?

A shotgun clause is a contractual provision commonly included in partnership agreements that allows one partner to compel another to either sell their ownership interest or buy out the initiating partner’s stake at a predetermined price. This clause acts as both a dispute resolution tool and a pricing mechanism to facilitate smooth transitions in ownership.

Typically, a shotgun clause is embedded within shareholder agreements and is sometimes called a "buy-sell agreement." It ensures that partners have a clear, enforceable method to resolve deadlocks or disagreements by forcing a buy-or-sell decision.

How Does a Shotgun Clause Work?

When a partner invokes the shotgun clause, they propose a price to purchase the shares of other partners. The other partners must then decide either to accept the offer and sell their shares or to buy out the initiating partner at the same price. This creates a fair and transparent valuation process.

Key Insights

• Shotgun clauses compel partners to either sell their shares or buy out the offering partner at a specified price.
• They are designed to resolve conflicts and deadlocks efficiently within partnerships.
• Often included in shareholder agreements, these clauses provide security by ensuring fair pricing.
• The clause can be initiated by either offering to buy or sell shares, with a quick timeline for completion.

The timeline for completing a shotgun clause transaction typically ranges from a few weeks to a few months, depending on the complexity of the deal and partnership terms. The initiating partner must carefully set the offer price, as rejecting the offer obligates them to purchase the other party’s shares at that price.

While straightforward in design, the shotgun clause is considered a blunt instrument that is most effective when business relationships are strained or operations are under pressure. It tends to favor partners with deeper financial resources and better understanding of the business.

Potential Drawbacks of Shotgun Clauses

Critics argue that shotgun clauses may not always yield the most efficient outcome, as the partner who ends up purchasing the company might not value it the highest. Alternative methods, such as ascending auctions among partners, have been proposed for fairer pricing.

Additionally, shotgun clauses can disadvantage partners with limited liquidity since the fast-paced timeline often requires quick access to funds, which can be challenging without established financing. This can skew outcomes in favor of wealthier partners.

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