At least on paper, shotgun provisions in shareholder and operating agreements provide an elegant and efficient buy-out solution when business owners can’t get along and need a divorce. In a two-owner company, the one who “pulls the trigger” names a price at which he or she either will buy the other’s interest or sell to the other. The other owner has a specified amount of time to decide which. Since the offeror doesn’t know who will be the buyer, in theory there’s a great incentive to name an objectively fair price. The agreement usually also will prescribe payment terms. No need for appraisal. No fuss. No muss.
I’m not aware of any data-based studies on the subject, but I believe experienced lawyers would concur that shotgun clauses, although frequently included in owner agreements, are rarely invoked. Why is that? I can only speculate that owners generally prefer other ways to achieve a breakup without the uncertainty of knowing who will end up with the business. Also, owners are reluctant to be the trigger-puller, that is, there’s a natural preference to be the one with the option to buy or sell at a price named by the other.
Shotguns also can suffer from informational and financial asymmetries between the owners, a problem highlighted in my two-part, online interview of Professors Landeo and Spier some years ago (here and here). As Professor Spier described it: Continue Reading Aim Carefully Before Pulling Trigger on Shotgun Buy-Sell Agreement