The Shotgun Clause: Building Exit Strategies Into Shareholder Agreements

When you go into business with a partner, the excitement of launching something new can make it easy to skip the hard conversations. What happens if we disagree? What if one of us wants out? What if one of us dies?

These aren’t pessimistic questions. They’re the foundation of a solid business partnership,  and a well-drafted Unanimous Shareholder Agreement (USA) is where those answers live.

What Is a Unanimous Shareholder Agreement?

A USA is a legally binding contract between all shareholders of a corporation. It governs how the business is run, how decisions are made, and critically, what happens when the relationship between shareholders changes. Think of it as the rulebook you hope you never need, but will be incredibly grateful for if you do.

Without one, you’re relying on default corporate law to sort things out — and those defaults rarely reflect what you actually want.

The Spouse Problem Nobody Talks About

Here’s a scenario worth considering. Your business partner passes away unexpectedly. Their shares form part of their estate and transfer to their spouse. You now have a new business partner — one you didn’t choose, who may have very different ideas about the direction of the company.

This isn’t hypothetical. It happens. And it’s entirely preventable with the right provisions in a USA, including share transfer restrictions and buy-sell clauses that determine what happens to shares when a partner dies or becomes incapacitated.

Enter the Shotgun Clause

One of the most well-known provisions in a shareholder agreement is the shotgun clause, and once you understand how it works, you’ll see why it’s such a useful tool for resolving deadlocks.

Here’s the basic mechanic: Partner A offers to buy Partner B’s shares at a specified price. Partner B must then either accept the offer and sell, or buy Partner A’s shares at that same price. Because the offering partner doesn’t know which role they’ll end up in, they’re incentivized to name a genuinely fair price.

It’s a simple, elegant way to break an impasse when partners can no longer agree and the business relationship needs to end. No prolonged litigation, no deadlock, but a clear mechanism for one partner to buy out the other.

Other Key Provisions Worth Knowing

Beyond the shotgun clause, a strong USA typically addresses several other important areas. Decision-making thresholds outline which decisions require unanimous consent versus a simple majority, preventing one partner from making unilateral moves. Restrictions on share transfers ensure that shares can’t be sold or transferred to outside parties without shareholder approval, protecting who can become a co-owner. Non-competition clauses prevent a departing partner from immediately setting up a competing business. And disability provisions address what happens if a shareholder becomes unable to participate in the business due to illness or injury.

Don’t Wait Until You Need It

The best time to draft a shareholder agreement is before things get complicated, which is ideally before you even open your doors. Once a dispute arises, it’s much harder to get everyone to the table in good faith.

At TLR Law, we help Manitoba business owners build partnerships that are set up to last and structured to handle the unexpected. Call us at (204) 925-1900 to get started.