The Shotgun Fund


The Prenups Of The Corporate World

The Prenups Of The Corporate World

By Benia Xu

The Wall Street Journal, March 5, 2009

 

There’s a fund for almost everything – infrastructure, turnarounds, energy. And tucked away in Ontario, there’s one investing in the prenups of the corporate world.

 

Toronto-based Argosy Partners Ltd. capitalizes on corporate splits by investing in “shotgun” deals, in which one business partner wants to break from the other and buy out the company. Argosy recently held a first close for its third shotgun fund, Shotgun Fund III LP, at over C$20 million ($15.5 million). It’s targeting a total of C$50 million to C$75 million, Principal Richard Reid said.

 

The “shotgun clause” works much like a prenuptial agreement. If conflict occurs and one partner makes a hostile offer for the company, the other partner has the option to buy his partner out, and gets a short period of time – usually 30 days – to come up with the funding if he doesn’t want to sell.

 

Partner Jim Ambrose remembers a “funny little shotgun” the firm almost turned down in 2002. In that case, the litigation lawyer showed up at their door with a bag of Visa and Mastercard slips. His client had owned an “out of the shoebox” chain of pharmacies that had been growing exponentially for the first several months. One day his partner locked him out, changed all system passwords, and told him he was fired and had until Monday to accept.

 

The hostile partner unknowingly pulled the trigger on the shotgun clause, and the lawyer called Argosy for help. His client ended up winning the company for around $150,000; the partner started a new business that closed within a couple years.
“It is a divorce. It’s got to be financed – and that’s the issue,” Reid said. But, he adds, like the prenup: “The great thing about the shotgun clause is that it takes all the drama off the table.”

 

Gabor Garai, a partner at Foley & Lardner LLP, says that such a fund right now makes a lot of sense. According to him, roughly 80% of shareholder agreements have shotgun clauses. The clause aims to keep things fair in anticipation of a rift – but with the drought of lending, the economy has “changed the game.”

 

“The assumption is that at a fair price, you can always get capital from the outside – it’s a self-controlling mechanism,” said Garai, who is not affiliated with the firm. “But now, that assumption is gone. Access to capital is so difficult; now that you have this funky situation, this type of specialized firm is a good idea.”






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