We previously wrote about shotgun clauses and their enforceability. Recent case law has provided additional insights into such clauses and how they work. This blog post will explore those recent cases and highlight some of the emerging nuances.
The recent case of Zaldin v. Goldstein et al. concerned a dispute between a father and daughter regarding an insurance agency. The daughter, Z, owned 10 per cent of the shares of the agency while her father, G, owned the remainder. The agency, in turn, owned all of the shares of a company that was a registered mutual fund dealer. After the business relationship between Z and G began to break down, Z commenced an action seeking an oppression remedy, among other relief.
G triggered a shotgun clause found in the shareholders’ agreement during litigation between them. The clause stated that any shareholder could make a written offer to sell all of their shares to the other shareholder at a specified price per share and on specific terms. The offer recipient then had 21 days to accept, failing which the offeree was bound to sell their shares to the offeror. The shareholders’ agreement further provided that each party had the right to specific performance in the event the other party breached the agreement. A schedule to the agreement also provided that each party would “do all other things required to effectively convey and deliver title to the shares.”
The first issue considered by the court was whether or not a binding agreement existed requiring G to sell his shares to Z. As the Superior Court of Justice noted, a binding agreement requires “an offer, acceptance, consideration, and an intention to create a legal relationship.” In addition, such an agreement required a “meeting of the minds’ on all essential terms.” As the Court observed, the “essential terms” of a share purchase had been found by previous court decisions to be the “identification of the parties, the property, and the price”. However, sometimes the closing date for the purchase has also been deemed an essential term (see the Manitoba case of Matic et al. v. Waldner et al., referenced by the Court in Zaldin).
The Court found that G had made a clear offer to sell his shares to Z and that it identified the property, the price, the parties, and the closing date. Z indicated acceptance of that offer. As such, there was a binding agreement for G to sell his shares to Z per the shotgun clause.
There was also disagreement between the parties as to whether regulatory approval was required to facilitate the share purchase and, if so, whether G had breached the terms of the agreement with Z by failing to obtain that approval. The Court pointed out that such regulatory approval was required and, in failing to “do all other things required to effectively convey and deliver title to the shares,” G had breached the agreement. This breach meant that Z had not been able to conclude and close the share purchase.
Finally, the Court considered whether Z was entitled to specific performance in relation to the share purchase. It noted that such a remedy was generally appropriate “when the contract at issue relates to the shares of a privately held corporation,” since such shares “may not be readily available on the market and valuation can be difficult.” The uniqueness of the shares may be a consideration factoring into the decision about granting specific performance.
The Court went on to describe the purpose of a shotgun clause. Such a clause is “meant to allow an expeditious, relatively inexpensive separation that accomplishes ‘leaving the potentially healthy, profitable business intact.” Such a clause balances the individual rights of the parties “by ensuring that the pulling of the trigger generates the best and highest price in exchange for the involuntary termination of the shareholders’ relationship.” As the Court noted, the very purpose of such a clause supports the conclusion that specific performance is an appropriate remedy.
The Court found that a binding agreement existed for G to sell his shares to Z and that, in failing to obtain regulatory approval, he did not have “clean hands.” In light of this and other factors, the Court found it appropriate to grant specific performance to Z.
Despite this, Z sought to have the Court find implied terms constituted part of the share purchase agreement, including that the purchase price for the shares should be adjusted based in part on certain company revenues. In this regard, the Court reviewed the decision of the Ontario Court of Appeal in Western Larch Ltd. v. Di Poce Management Ltd., in which the Court commented on the law implying terms in the context of shotgun clauses. That Court stated its task was “to consider whether compliance with the shotgun buy-sell provision is sufficiently strict, given the vagaries and complexities of commercial arrangements and commercial life.” It noted that such arrangements are “plainly accounted for” in the wording included in the parties’ contract, and implying a term into the agreement required a “certain degree of obviousness to it.”
Further, the Court in Zaldin cited case law supporting the notion that it is not necessary that a shotgun clause include terms requiring that an offer reflect the fair market value of the company and, where the parties have decided not to include a valuation requirement, it was “not the court’s role to add one.”
As such, Z’s request to imply terms around the price for the shares was denied.
Another recent case, Penelas v. Cruise, considered the appropriate terms to require a party to sell its shares pursuant to a shotgun process. In particular, a key issue in that case was which party should be required to trigger the process. Each of the parties requested that the other party initiate the process, for as the Superior Court of Justice noted, each party saw a “tactical and financial advantage” to having the other party trigger the shotgun clause.
In short, the Court in that case considered the equities between the parties in determining which of them should be required to trigger the buy/sell process. One of the parties referenced what they referred to as the “Safarik principle,” in relation to a principle referenced in the B.C. The court of Appeal case of Safarik v. Ocean Fisheries Ltd. was approved by the Ontario Court of Appeal in D’Antonio v. Monaco. It is worthwhile mentioning the Safarik principle here.
The Safarik principle holds that “where there is a deadlock between equal shareholders of a corporation and a shotgun process is necessary, and the equities are otherwise even, the insider, involved in the day-to-day operation of the corporation, should be the person who sets the price.”
The Court in Penelas ultimately required the party who worked at the company “day-to-day” with its employees and customers to trigger the shotgun process, although various reasons were given for this. Shareholders would be wise to heed the importance of the Safarik principle in a dispute over which shareholder might be ordered by a court to initiate a buy/sell arrangement.
Don’t let complex shareholder agreements and “shotgun clauses” jeopardize your business’s future. The Toronto corporate lawyers at Milosevic & Associates have extensive experience advising business owners, directors, officers, and shareholders on these intricate matters and defending their rights. Our team can help you understand the nuances of recent case law and ensure your venture’s continued success.
Contact us today for a consultation. Call us at 416-916-1387 or reach out online to discuss your specific situation and learn how we can protect your interests.
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