Shot Gun Control: Parties must comply strictly with terms of shot gun clauses, says Ontario’s highest court
February 23rd, 2011
In the recent decision of Zeubear Investments Ltd. v. Magi Seal Corporation, the Court of Appeal for Ontario had the opportunity to consider the proper interpretation of a shot gun (buy-sell) provision in a shareholders agreement. Ultimately, the court concluded that, in order to obtain the benefit of such a clause, a shareholder must strictly comply with its terms.
The dispute at issue in this case was whether or not one group of shareholders should be deemed to have agreed to purchase the interests of another group of shareholders, and what terms would govern any such agreement.
The shares in dispute were those issued by two corporations, Magi Seal Corporation and Magi Seal International Inc. (the “Corporations”). Until February 2007, the Corporations had been wholly owned by June and James Harris. However, in February 2007, 40% of the Corporations’ shares were purchased by Bradford Geddes through his holding company, Zeubear Investments Ltd.
At the time of the share purchase the parties executed a shareholders agreement, which included a shot gun buy-sell regime. This structure permitted either party, upon provision of notice, to offer to purchase the other party’s shares and simultaneously offer to sell its own shares at the same price. The proposed terms and conditions would apply equally to the offer to purchase and the parallel offer to sell.
Additionally, the shareholders agreement listed certain terms that would apply to any shot gun offer, including that payment of 50% of the purchase price would be due on closing, while the remaining 50% would be satisfied by way of promissory note, payable within one year of the closing of the transaction. The agreement also provided that if the recipient of the shotgun offer did not respond to the offer within 30 days, that party would be deemed to have accepted the offer to purchase issued by the triggering party.
In late 2009, Geddes’ employment with the Corporations was terminated.
Subsequently, in January 2010, the Harrises made an offer to purchase Geddes’ interests in the Corporations. The terms of this offer included the requirement that the entirety of the purchase price be paid on closing. Geddes purported to accept the offer, though in response elected to purchase the shares held by the Harrises rather than to sell his shares. In this purported acceptance Geddes also indicated that 50% of the purchase price would be paid on closing and the balance satisfied by way of promissory note.
The Harrises took the position that Geddes’ purported acceptance was invalid, in that the latter had not agreed to purchase the Harrises’ shares on the precise terms offered, and thus should be deemed to have agreed to sell his shares to the Harrises. In turn, Geddes argued that all offers made under the shot gun provisions of the agreement were deemed to include specific terms, including that payment of the purchase price was to be made in two equal instalments.
Geddes, through his holding company, commenced an application in the Superior Court of Justice seeking an order declaring that his acceptance of the Harrises’ offer to sell was valid and enforceable. The application judge sided with the Harrises, holding that the shareholders agreement stipulated only the minimum terms that a party must include in an offer in order to trigger the buy-sell process. Accordingly, the application judge found that the Harrises were at liberty to require that 100% of the purchase price be paid at closing, and thus held that Geddes had accepted the Harrises offer to purchase his shares.
While it is correct that the Harris group was the triggering shareholder, it could only make an offer that conformed to the shareholders agreements. The Harris group’s offers were deemed to include the payment terms set out in s.4.12(2)(c). The Geddes group’s acceptances responded to those offers. In my view, the acceptances were valid.
As a result, the Court of Appeal held that Geddes was entitled to acquire the Harrises’ shares as at April 22, 2010, and was entitled to be put in the position he would have been in had he been able to do so.