Shotgun buy-sell provisions are often found in shareholder, partnership and joint venture agreements. In the case of Western Larch Limited v. Di Poce Management Limited, the appellants appealed the decision of a motion judge sitting on the Commercial List to grant partial summary judgment in a dispute over the exercise of a buy-sell provision in a partnership agreement. This judgment of the Ontario Court of Appeal provides some background on this type of provision.
At paragraphs 40-41, buy-sell provisions are explained as follows:
40 Unanimous shareholder agreements, partnership agreements, and joint venture agreements often contain what is commonly known as a “shotgun buy-sell provision”. This is a mechanism for involuntarily expelling one or more of the parties from a business venture, which will continue without the exiting party’s participation. Expulsion is a remedy available where, for example, the participants no longer get along, as in this case.
41 Shotgun buy-sell provisions generally share the following features. The offeror party triggers the provision by putting a shotgun buy-sell offer to the offeree party. The offeror offers to buy the offeree’s interest in the business venture, or to sell its own interest to the offeree. The offer specifies a value. The offeree must decide whether to buy out the offeror, or to sell its interest to the offeror, at the determined price. Depending on the size of the respective interests, the amounts paid to buy, on the one hand, and to sell, on the other hand, may be quite different, although they are to be based on the specified value. The offeree must make the choice by a certain date. If the offeree does not respond by choosing, then the offeror may force the purchase on the offeree, and require closing on the terms set out in the offer. Not all of these features are always present and close attention must be paid to the specific contractual language of the shotgun buy-sell provision in order to ensure that an offer is compliant.
When exercising a buy-sell provision, the buy-sell offer must strictly comply with the provision being exercised. The appellants in this case argued that the buy-sell offer did not comply perfectly with the buy-sell provision found in the partnership agreement.
In the end, the Court dismissed the appeal and provided us with the following summary (at paragraph 65):
- To be enforceable, a shotgun buy-sell offer must comply strictly with the shotgun buy-sell provision in the authorizing agreement [para. 42].
- Strict compliance is not perfect compliance [para. 46].
- In deciding whether a shotgun buy-sell offer meets the strict compliance test, the commercially reasonable expectations of the parties in the factual context must be considered. Much will depend on the language of the authorizing agreement and the shotgun buy-sell provision [para. 47].
- The inclusion of an alternative in a shotgun buy-sell offer that does not comply strictly with the shotgun buy-sell provision in the authorizing agreement does not affect the enforceability of the buy-sell offer, provided that a compliant alternative is also included [para. 49].
- The court will not enforce the alternative that is not strictly compliant with a shotgun buy-sell provision. It will enforce the compliant alternative shotgun buy-sell offer [paras. 52, 58].
- The court will find compliance to be sufficiently strict, and will enforce a shotgun buy-sell offer containing elements of non-compliance that are, in the particular factual context, commercially insignificant, and which can be fully and fairly remedied by damages [paras. 63-64].