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Advantages and disadvantages of shotgun clauses

On Behalf of | May 2, 2023 | Business & Commercial Litigation

If you are joining with a partner in Massachusetts to start a business, your partner may ask you to include a shotgun clause in your business agreement. This clause can force you to sell your company share or buy your partner out. In some cases, a shotgun clause is called a buy-sell agreement.

Advantages of shotgun clauses

Since partner A will not want to offer partner B a price that is too, partner A will provide a fair value. If the price is too low, partner B will reject the offer and have the option of buying out partner A, so everyone is assured of getting a reasonable price for their investment. Furthermore, these clauses allow partners who discover that they do not work well together a quick way to get out of the business relationship. Shotgun clauses often help create more reasonable negotiations between partners. This can particularly be useful in companies where there is little liquidity value.

Disadvantages of shotgun clauses

Like most things in business, shotgun clauses also have some disadvantages. Partners with limited resources can find themselves at a disadvantage if they want to exercise this clause. In that case, partner A who just invested in an unrelated business may have limited resources left. Partner B can offer them a low price, and partner A may have to accept it because they do not have the resources to buy partner B’s shares.

Before entering negotiations that include a shotgun clause, you will want to obtain the help of an attorney. The attorney will look over the contract with you and help ensure that you will not be at an unfair disadvantage.