Shotgun clauses frequently timed to leave targeted partners without ability to respond.
The financial playing field for partners in private Canadian companies was leveled today. With the launch of The Shotgun Fund, a pool of managed capital is now available to enable a partner on the receiving end of a triggered shotgun clause to buy his or her partner’s share of a business rather than becoming a forced seller. For lawyers, in particular, this now means that a new and attractive source of risk capital could be available to their clients.
Unique in North America, The Shotgun Fund fills a financing void, for amounts between $1 million and $10 million, that has not previously been met. It is also unique in the sense that the lawyer/client relationship is fully protected. "We recognize the importance of partnering with the legal community and to ensuring that everyone benefits from any transaction that may be concluded," says Richard Reid, Managing Partner of Argosy Partners Ltd., the firm that manages The Shotgun Fund.
A shotgun clause is the ultimate tool for resolving business conflicts. One party initiates a buyout and sets the price. The other party chooses to match the price being offered or to sell. The time frame in which the transaction must be concluded is usually 30 days, commencing on the trigger date.
Apart from being a safety valve, shotgun clauses can also be used as a weapon when one shareholder senses another’s personal or financial constraints and pulls the trigger on a low-ball offer.
"There are thousands of partner-owned private businesses in Ontario that have a record of strong growth and earnings," says Reid. "Notwithstanding their business success, a number of these partnerships unravel each year as the result of one partner triggering the buy-sell (shotgun) clause."
One such company is Blockade Systems Corp., which develops and markets security software. A year ago, one of the partners triggered a shotgun clause which, if successful, would have forced the founder and original product developer to sell out his share. "One day it was business as usual and the next day I was staring down the barrel of a triggered shotgun agreement", says Rick Liliani, Chairman and CEO. "Although I managed to find investors and retain the business, it was a difficult time for me and my family. I can certainly appreciate the need for a fund whose purpose is to assist partners in similar circumstances."
The Shotgun Fund will initially focus on manufacturing, service or distribution sector businesses that generate annual sales of more than $10 million and that have a value of at least $5 million.
Jim Ambrose, Argosy’s finance partner, says, "Our fund’s purpose is to secure the remaining partner’s stake in the company to which he or she has devoted years of effort. As well, it brings another dimension of expertise to the company. Our fund has been created to respond to situations which provide us with a sound financing opportunity and an equity involvement in the company’s future".
"Our investors and our advisory board members have a wealth of experience in valuing, managing and growing these types of companies," concludes Reid. "Our ability to rapidly determine the current and potential worth of such enterprises will be a strong advantage given the very tight time frame for responding to most shotgun clauses."