Written by Xiyuan Feng
A shareholder agreement is a contract among some or all of the shareholders for governing their relationship in governance of the corporation, It is an agreement that usually sets out conditions and obligations which shareholders agree upon, and sometimes, a mechanism for the transfer of shares.
A shotgun clause is one type of mechanism to deal with shareholder disputes. In this mechanism, typically, one shareholder gives notice to the other shareholders of the first shareholder’s intention to acquire all of the shares belonging to the others. The recipient shareholder or shareholders must either:
- sell all of his, her, or its shares to the offeror on the terms provided in the notice; or
- acquire all of the offeror’s shares under the same terms and conditions.
This shotgun mechanism can be useful when shareholders reach an impasse, yet it may also bring high risks to some parties.
Some of the risks posed by shotgun clauses were core to the recent judgement of the Court of Appeal of British Columbia in Blackmore Management Inc. v. Carmanah Management Corporation. Blackmore Management Inc. (“Blackmore” or “plaintiff”), Amphitrite Management Inc. and Carmanah Management Corporation each own one-third of First Light Technologies Inc. (“FLT”). Amphitrite and Carmanah are collectively referred to by the Court as “the respondents”. The principals of Blackmore and Amphitrite are signatories to the shareholder agreement, but their interests were assigned to their respective corporations which were shareholders of FLT. The principals of each of the three corporations were directors of FLT. Section 5.1 of the agreement lays out a shotgun clause, and sections 5.2 and 5.5 provide the recipient shareholder with a 60-day period to make an election (“election period”), after which it is deemed to have accepted the offer to sell:
5.1 Any Shareholder (the “Instigator”) will have the right to deliver to the other Shareholders (the “Recipient”) a notice in writing (the “Compulsory Offer”) stating that …: (a) the Instigator offers to sell to the Recipient … all but not less than all of the Instigator’s Investment …; or (b) to buy from the Recipient the Recipient’s Investment …
5.2 The Recipient will be entitled, at its option within 60 days from the date of the receipt of the Compulsory Offer …
5.5 If the Recipient does not notify the Instigator in writing within the 60 day notice then the Recipient will be deemed to have accepted the offer to sell to the Instigator the Recipient’s Investment … (Emphasis added.)
In early 2020, the respondents invoked the shotgun clause: Blackmore could choose, by March 27, 2020, either to sell its shares for $1,500,001 or to acquire all respondents’ shares for $3,000,002. However, because of disputes about disclosing financial documents, Blackmore filed a petition for an injunction, which led the parties to agree, in March, to suspend the election period until the proceeding of injunction has been heard (“March Agreement”). Unfortunately, COVID-19 pandemic caused a delay of the hearing date from March to August, during which the value of FLT increased significantly. Being aware of the increase in value, the respondents communicated their revocation of the shotgun offer in June 2020. A month later, Blackmore elected to purchase the respondents’ shares.
The main dispute before the Court was whether the respondents could revoke the shotgun offer. The Chambers judge concluded it was revocable because the March Agreement did not freeze the shotgun offer, and the offer could be revoked any time prior to acceptance. The Court of Appeal reversed the Chambers decision on this point by ruling that the shotgun offer is irrevocable during the election period, and the March Agreement effectively extended the election period to August.
Whether the respondents can revoke the shotgun offer unilaterally within the election period is subject to the parties’ intention underlying the shotgun clause in the shareholders’ agreement since the offer is a procedure following the shareholder agreement. To clarify the intention, wordings used in the agreement and the surrounding circumstances at the time of contracting are analyzed. Based on the use of the word “compulsory” in section 5.1 of the shareholder agreement, the use of the word “entitled” used in section 5.2, and a forced consequence when election is not made in the election period articulated in section 5.5, the Court found that once the clause is invoked, the process cannot be stopped. With respect to the surrounding circumstances, the Court focused on the commercial purpose of a shotgun clause, that is, to terminate the shareholder relationship on mutually fair terms. Allowing the respondents to unilaterally revoke the shotgun offer when the market value of shares fluctuates neither promotes a fair price for shares nor is consistent with the objective. Additionally, having an election period is to make the offer irrevocable during that period, which further supports this Court’s position.
With regard to the length of election period, the issue was whether the delay caused by COVID-19 pandemic frustrates the March Agreement, which, as the respondents claimed, only aims to extend the election period “for a matter of days”. The Court rejected the frustration argument as the intention as such has not been specified; for instance, the respondents did not specify an end-date for the tolling period or fix a date on which to re-evaluate. In addition, the respondents consented to the extension of the election period caused by the pandemic through agreeing with the new hearing date without any contest.
This case showed that a shotgun offer is highly unpredictable and may be irrevocable. As this case demonstrates, a shotgun offer should only be used with care, often only when shareholders have equal bargaining power and strong financial resources. Before invoking a shotgun clause, the parties ought to calculate the risks and uncertainties in the near future and set a short, specific term for completing the transaction, which may help them avoid the impact of unforeseen market fluctuations that can lead to significant losses.
 This case arose under the British Columbia Business Corporations Act SBC 2002, c 57. This statute does not reference the concept of a unanimous shareholder agreement. Of course, under Canadian corporate statutes (see Canada Business Corporations Act, RSC 1985, c C-44 [CBCA]), the concept of a unanimous shareholder agreement (defined under CBCA, s-s 146(2)) is the only way to remove power from the directors (see CBCA, s-s 102(1)).
Under statutes like the CBCA and its progeny (this does not include the British Columbia Business Corporations Act), a unanimous shareholder agreement is in part contractual, and in part constitutional, while a non-unanimous shareholder agreement is contractual in nature only, and cannot affect how the corporation is run. See Duha Printers (Western) Ltd. v. Canada,  1 SCR 795.
 Halsbury’s Laws of Canada (online), “Income Tax (Corporate), Nature of shareholders’ agreement” (V.2.(1)) at HTC-64.
 Halsbury’s Laws of Canada (online), “Income Tax (Corporate), Methods of purchase and sale” (V.2.(2)(c)) at HTC-67.
 Blackmore Management Inc. v. Carmanah Management Corporation, 2022 BCCA 117 [Blackmore (CA)].
 Ibid at para 3.
 Ibid at para 6.
 Ibid at para 4.
 Ibid at paras 34-35.
 Ibid at paras 9-10.
 Ibid at para 15.
 Ibid at paras 15-16.
 Ibid at para 17.
 Ibid at para 18.
 Ibid at para 19.
 Blackmore (CA), supra note 5,at paras 23-24. See Blackmore (QB), ibid, at paras 60-63.
 Blackmore (CA), ibid at paras 45-48, and 56.
 Ibid at para 31.
 Ibid at para 32 (citing Sattva Capital Corp. v. Creston Moly Corp, 2014 SCC 53 at para 47).
 Blackmore (CA), ibid at para 38.
 Ibid at para 36.
 Ibid at para 42.
 Ibid atpara 43.
 Ibid at para 50 (citing Albanese v. Albanese (1999), 1 B.L.R (3d) 131 (Ont. SCJ)).
 Blackmore (CA), ibid at para 57.
 Ibid at para 61.
 Ibid at para 67.
 Supra note 2.
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.