A ''shotgun clause'' (or Texas Shootout Clause) is a

term of art Jargon is the specialized terminology associated with a particular field or area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a partic ...

, rather than a legal term. It is a specific type of exit provision that may be included in a

shareholders' agreement A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) (SHA) is an agreement amongst the shareholders or members of a company. In practical effect, it is analogous to a partnership agreement. It can be said th ...

, and may often be referred to as a buy-sell agreement. The shotgun clause allows a shareholder to offer a specific price per share for the other shareholder(s)' shares; the other shareholder(s) must then either accept the offer or buy the offering shareholder's shares at that price per share.

Discussion

Typically, an exit clause is triggered in situations where a business partnership has severely deteriorated, and so the situation is often likened to a divorce. In the same way that drawn-out battles between a splitting couple can often leave children with emotional damage, so too can a business be damaged by drawn-out fighting between its owners. For this reason, experts in the area emphasize the importance of including an exit clause in a firm's shareholders' agreement in order to minimize the negative impact of a business-divorce. As with a

prenuptial agreement A prenuptial agreement, antenuptial agreement, or premarital agreement (commonly referred to as a prenup), is a written contract entered into by a couple prior to marriage or a civil union that enables them to select and control many of the leg ...

, it is important to set out an exit clause early on in a business relationship when interests are still aligned and partners still like each other. Shotgun clauses protect the interests of both or all parties regardless of their stake in the company. If one party decides to trigger the clause, it is in their best interest to make a well considered, fair offer - for if they make a low offer, their partner(s) may raise the resources to turn the offer against them, a counteroffer they would be bound to accept.

Process

The shareholder triggering the clause offers to buy the shares of the others at a specific price per share. The other shareholder(s) must then either accept the offer and sell their shares, or buy the triggering shareholders' shares at that same price. Alternatively, the clause can be structured so that the triggering shareholder offers to sell his shares at a specific price per share, and the other shareholders can then accept the offer or sell their shares to the triggering shareholder at the set price. The timeline is generally very short, although there are no hard and fast rules. It would not be unusual to have 20 to 40 days to elect to sell or buy, and another 20 to 40 days to close. If the recipient of the offer does not respond in the allotted period of time, the offer is assumed to have been accepted.

Rationale

The clause is most applicable when both partners want