This is the second installment of a two-part interview of Claudia Landeo (photo right; read bio here), Associate Professor of Economics at the University of Alberta, and Kathryn Spier (photo left; read bio here), the Domenico de Sole Professor of Law at the Harvard Law School, on their forthcoming article in the Yale Journal on Regulation called “Shotguns and Deadlocks” [available on SSRN here].

Click here to read Part One of the interview, here to view Professor Landeo’s SSRN home page linking to her numerous published articles and discussion papers, and here to view Professor Spier’s lengthy list of academic publications.

Part One covered some of the basics of the shotgun buy-sell mechanism, its utility in resolving deadlock disputes, and the challenges posed by asymmetries of information and financial capabilities as between the owners. The discussion continues in Part Two, focusing on judicial implementation of the shotgun and the experimental data supporting selection of the better-informed owner as the offeror.

Mahler: You told us that, unlike in the context of ex ante private agreements, judges might have the ability to address problems with asymmetries that can better ensure equitable outcomes for shotgun mechanisms. What are some of the things judges can do?

Spier: The judge might use her discretion when one party is under financial duress. Specifically, the judge might mitigate the negative effects of financial asymmetries by giving parties adequate time to arrange for financing of the buy-sell operations. If the financial asymmetries cannot be mitigated by judicial order, then the judge can certainly consider alternative mechanisms or approaches. Continue Reading Interview With Professors Claudia Landeo and Kathryn Spier on Shotguns and Deadlocks: Part Two

Dissolution cases involving deadlocked 50/50 owners of closely-held business entities present some of the most intractable problems likely to be encountered by business divorce practitioners and judges. In states such as New York, the problems are greatly exacerbated by the absence of a statutory buy-out remedy in deadlock dissolution cases — unlike dissolution cases brought by oppressed minority shareholders where the statute gives the corporation or the other shareholders the ability to avoid dissolution by acquiring the complaining shareholder’s stock for fair value. The LLC laws in New York and many other states likewise have no statutory buy-out mechanism in dissolution proceedings.

The difficulties with deadlock cases also frequently stem from the absence of a “natural” buyer and seller, that is, each of the 50% owners may be vying to buy out the other; from the owners’ divergent valuations of the business assets and operations, which may be tied to the owners’ personal know-how and/or their transient relationships with customers and vendors; and from the challenges, expense and time involved in getting appraisals for closely-held firms in an adversarial environment.

When both deadlocked owners are potential buyers, and under the right circumstances, the “shotgun” buy-out mechanism can be one of the most efficient means of getting to a business separation. For those not familiar with the shotgun, it’s when owner #1 sets the buy-out price and owner #2 has the option either to buy or sell at that price. Lawyers who prepare shareholder agreements sometimes feature the shotgun in the agreement’s buy-sell provisions, its exercise being made contingent on specified trigger events. Some weeks ago, I wrote about the Fulk case, involving a deadlock dissolution lawsuit before the Delaware Court of Chancery, in which the court compelled one of the company’s two owners to make a shotgun buy-out proposal.

I discovered the Fulk case in a fascinating and highly informative article called Shotguns and Deadlocks (available on SSRN here), authored by Professors Claudia M. Landeo and Kathryn E. Spier and slated for publication in the Yale Journal on Regulation. Professor Landeo (pictured above right; read bio here) is an Associate Professor of Economics at the University of Alberta in Edmonton, Canada. Professor Spier (pictured above left; read bio here) is the Domenico de Sole Professor of Law at Harvard Law School. Their collaborative article advocates greater judicial utilization of shotgun buy-outs in business deadlock cases and, using economic theory and data from laboratory experiments, argues that courts should assign the role of offeror to the better-informed owner. It’s a must-read article for members of the bar and bench who litigate and preside over deadlock dissolution cases. Continue Reading Interview With Professors Claudia Landeo and Kathryn Spier on Shotguns and Deadlocks: Part One