The Shotgun Fund

Three Amigos Live and Learn

Three Amigos Live and Learn

March 2010

In the early summer, we received a call from a lawyer we know. She had three clients who were in trouble.

These three young Americans from a small town in New Mexico came up to Toronto to merge with a successful Canadian firm. In the merged company, the three amigos held 50% of the equity and the Canadians the other half.

Under the handshake agreement, the three friends believed the Canadians were contributing $2 million in equity for expansion. However, under the shareholder agreement it was to be debt. Our American cousins had never had a shareholder agreement, trusted their Canadian partners and had never lived in a big city.

They accepted a pay cheque suitable for small town living (population: 8,000) and left wives, car payments and mortgages in NM. They had to share a condominium in Toronto.

The relationship soured: the Canadians ended their paycheques and started to squeeze them. They came to see us.

There was a shotgun clause in their shareholder agreement. It was flawed. It allowed our new partners to pull the shotgun at an asynchronous price: the offer had to be for a dollar amount per share and cents on the dollar for each dollar of debt.

Our friends exercised the shotgun at a high amount for the shares and a penny per dollar of shareholder debt, putting the Canadians in an uncomfortable position. The Canadians reacted by taking our new partners to court.

The three amigos thought hard and long about having no income, living in a foreign city, and having no assets but liabilities and family in New Mexico. The Canadians made a fair offer for their shares.

The three amigos are now living in Costa Rica and have used their funds to build another business. We wish them all the best and hope we can participate.

They have committed to read any new shareholder agreements. They will be 30 in a few years.

Richard Reid and Jim Ambrose
The Shotgun Fund
(416) 367-3617
and for fun


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