What is a “shotgun” clause?
A “shotgun” clause provides an escape mechanism for shareholders if there is a serious dispute that cannot be resolved. One shareholder may offer to buy the other shareholder’s shares for a certain price. A shotgun clause stipulates that the other shareholder may either sell his/her shares at that price, or buy the offering shareholder’s shares at that same price. This process provides incentive for the offering shareholder to name a fair price. However, if shareholders have unequal financial resources, one shareholder could specify an unfairly low price, knowing that the other shareholder cannot afford to buyout the offered shares. The offerer could then turn around and buy the shares of the weaker shareholder at the unnaturally low bid. The shotgun clause, therefore, might also require that a fair price be set for any buyout offer.
