The Court of Appeal for British Columbia (“BCCA”) recently considered the revocability of a shotgun clause in a shareholders’ agreement in the case of Blackmore Management Inc. v Carmanah Management Corporation. At issue was whether a “shotgun offer” made pursuant to the compulsory buy-sell provision of a shareholders’ agreement was revocable within the contractual election period.
The respondents, Carmanah Management Corporation (“CMC”) and Amphitrite Management Inc. (“AMI”), together with Blackmore Management Inc. (“Blackmore”), each owned one-third of First Light Technologies Inc. (“FLT”). CMC and AMI (the “Respondents”), assignees of their principals David Green and Sean Bourquin, respectively, and together with Justin Taverna the principal of Blackmore, were all parties to a shareholders’ agreement for FLT.
Blackmore and Taverna (the “Appellants”), sought, among other things, a declaration from the BCCA that a shotgun offer was not revocable during the election period.
What is a shotgun clause?
We previously wrote about different types of provisions, including shotgun clauses, included in a shareholders’ agreement here. The “shotgun” provides for a worst-case scenario situation under a shareholders’ agreement, whereby a shareholder can offer to either: (1) sell his or her own shares to an existing shareholder or shareholders, or (2) offer to purchase the shares of an existing shareholder or shareholders, for the same terms and conditions and at the same price as the shareholder’s offer to sell his or her own shares.
The other shareholder or shareholders can decide whether to buy or to sell their shares based on the terms and the price offered by the offering shareholder. As such, the consequence of a shareholder triggering the “shotgun” is that at least one of the shareholders will sell their shares and cease to be a shareholder.
The shotgun offer made to the Appellants
In this case, the shotgun in FLT’s shareholders’ agreement was invoked by the Respondents by delivering a notice to Blackmore and Taverna on January 27, 2020. The election period was 60 days and set to end on March 27, 2020. On February 21, 2020, Taverna advised Bourquin and Green that he intended to secure financing for Blackmore to purchase the Respondents’ shares.
The parties agreed on March 13, 2020 (the “March Agreement”) to suspend the time for Blackmore to make an election until the proceeding regarding an injunction filed by Blackmore and Taverna (to freeze the time for Blackmore to make its election and for an order that FLT deliver accounting records to assist Taverna and Blackmore in evaluating the shotgun offer). At that time, the parties agreed on a March 25, 2020 hearing date.
However, the courts suspended in-person operations on March 19, 2020 due to the Covid-19 pandemic and the injunction application was not heard on March 25, 2020. The parties then became aware by June 2020 that FLT had significantly increased in value. Consequently, the Respondents purported to revoke the shotgun offer on June 29, 2020 on the basis that world events and Blackmore’s commencement of legal proceedings had fundamentally changed the circumstances related to the shotgun offer.
Nonetheless, Blackmore delivered a notice on July 23, 2020 to the Respondents electing to purchase the Respondents’ shares at the valuation stipulated in the shotgun offer. On August 14, 2020, the Appellants amended their petition seeking a declaration that the shotgun offer was not revocable and Blackmore’s election to purchase the Respondents’ shares was enforceable.
Shotgun clause not revocable
The BCCA allowed the appeal and overturned the chambers judge’s finding that the shotgun clause in this case was revocable. In concluding that the shotgun in the shareholders’ agreement was not revocable, the BCCA found that, given the plain meaning of the shareholders’ agreement and surrounding circumstances, the shareholders intended for the clause to be irrevocable during the 60-day election period and that the chambers judge made a palpable and overriding error.
Some of the relevant factors considered by the BCCA in making this finding included:
- The ordinary and grammatical meaning of the provisions in the shareholders agreement:
- the shotgun offer was described as a “Compulsory Offer” in the agreement;
- mandatory language in the agreement suggested that the recipient must choose to either buy or sell;
- The surrounding circumstances of a shotgun provision and commercial principles:
- commercial reasonableness suggested that revocable shotgun offers would weaken the incentive for shareholders to make a fair offer at fair market value;
- shotgun provisions were not intended to allow shareholders to “test out” valuations of a company, but rather to end the shareholder relationship on mutually fair terms;
- the Respondents submitted no cases where a shotgun clause was interpreted to be revocable;
- the parties were experienced business people: if the Respondents wished to bargain for revocability to mitigate risks made under a shotgun clause, they ought to have included an express provision to that effect in the shareholders’ agreement;
- there was always a risk of market fluctuations during an election period, so parties can mitigate this risk by bargaining for a shorter period; and
- in this case, the shotgun offer was only open for longer than the contemplated election period because the Respondents agreed to toll the election period.
The BCCA also rejected the Respondents’ argument that the Covid-19 pandemic amounted to an unforeseen, intervening event that frustrated performance of the shareholders’ agreement, finding that (1) the circumstances did not amount to frustration, (2) the Respondents acquiesced in the delay – pointing to the March Agreement between the parties, and (3) there was no purported termination of the March Agreement. In fact, the Court found that the Respondents were content with the March Agreement (to toll the election period) and appeared to remain so until they became aware of the company’s increased value.
This case illustrates the importance of drafting contractual provisions with sufficient specificity to mitigate business risks, such as the fluctuation of market valuations during an election period. Because the court will consider the relative sophistication of contracting parties in contractual disputes, that fact that all parties here were considered experienced business people was relevant to the court’s interpretation of the shareholders’ agreement and the shotgun provision. This judgment, being from the BC Court of Appeal, is not binding precedent on Alberta courts, however it is likely that Alberta courts would review many of the same factors mentioned in this judgment if presented with a similar legal issue.
An experienced corporate lawyer can assist parties with drafting provisions of a shareholders’ agreement to address the unique facts and circumstances of each specific relationship. Here, although the Respondents asked the Court “to rescue them from a bargain they now regret”, the BCCA held it was inappropriate to do so.
Carscallen LLP’s Corporate Governance Expertise
This case illustrates the significant advantage to having a shareholders’ agreement precisely tailored to your business, and the disadvantages of having to resort to time consuming and costly litigation to resolve shareholder disputes. Carscallen LLP’s experienced corporate lawyers can help you draft a shareholders’ agreement that anticipates and provides for the long term needs and objectives of your business and shareholders. Our team is also available to review any existing shareholders’ agreements, including shareholder rights plans.
We are committed to understanding your business needs and offering timely, targeted legal advice that helps meet your requirements. With the practical experience to advise on every aspect of business law and commercial transactions, we work with you to get deals done. Please feel free to contact any member of our Corporate Governance group if you have any questions about shareholders’ agreements or any other business issues.*This update is intended for general information only on the subject matter and is not to be taken as legal advice.