Buyouts

When shareholders are in a dispute, one solution is to remove one or more of the shareholders from ownership of the company by buying their shares.

Buyouts can occur if an agreement is reached under the terms of a shareholders’ agreement or negotiations.  The intention of a structured buyout is to address the grievance or deadlock by re-distributing the shares so that the business can continue to operate.

A buyout can also occur through a court order. Section 248(3) of the Ontario Business Corporations Act, RSO 1990, c. B.16 B gives the court discretion to direct the company or another shareholder to purchase all of a shareholder’s shares in certain situations: see the Oppression Remedies section of this website for more information.

Shotgun Clause

A shareholder buyout can occur as part of the shareholders’ agreement. A shotgun clause is a common exit clause that forces a shareholder to buy the another shareholder out of the company. Under a shotgun clause, Shareholder A triggers the shotgun clause by offering to buy all of Shareholder B’s share for a specific price. Shareholder B then has the choice to accept the offer as is or buy all of Shareholder A’s shares at the offered price. The timelines for acceptance are usually short.

Shotgun clauses are often complex and strategic; the price for the shares under a shotgun clause can either be pre-set in the shareholders agreement or left up to the shareholder making the offer. Shareholder A should consider making a fair offer; if it is too low, Shareholder B may have or could raise the funds to buy out Shareholder A. Alternatively, if Shareholder A has deep pockets and is more concerned with pushing Shareholder B out of the company, then a higher price may entice Shareholder B to accept.

A shotgun clause without a pre-set price works where both parties have the means to buy the other out. However, when only one party has the necessary funds, it can result in a disingenuous offer being made and a below market price set as a result.

Owner-operated businesses can encounter another complication with shotgun buyout clauses when only one shareholder is capable of running the business.  Again, the shotgun clause would only work in the favour of the party that can run the business.  For this reason, a shotgun clause is not a one size fits all solution.

Other Types of Buyout Clauses

There are other types of buyout clauses that can appear in a shareholders’ agreement. The price can be pre-set, based on a formula driven by the financial statements, or established by an appraiser. While appraisals are more accurate, they can be more costly and the subject of litigation. The buyout can be triggered by events such as a default or death, or simply at the election of one of the shareholders. It is a good idea to discuss the buyout or exit clause with a legal advisor before entering into a shareholders’ agreement because this agreement will dictate how buyouts are governed.

Court Directed Buyouts

As indicated, a court can order a buyout as an oppression remedy.

When a court orders a buyout, the court normally sets the purchase price based on the fair market value of the shares based on the parties’ evidence, including from professional valuators. The court will also decide on an appropriate valuation date based on the evidence.

If the parties have the same competitive capacity, a court may instead order the sale of shares through a buy-sell shotgun arrangement or an auction.

Absent conduct that is oppressive or unfairly prejudicial, a court can also order the winding-up of a company if it is just and equitable to do so, such as if there is an a deadlock between the shareholders or board members of a company (see s. 207 of the Business Corporations Act).