Shotgun clause in shareholder's agreement not revocable: B.C. Court of Appeal

Clause meant to force sale of shares; pandemic or share value increase didn't change obligations

Shotgun clause in shareholder's agreement not revocable: B.C. Court of Appeal
Risk of increase in price is presumed considered when a shotgun offer is made

The British Columbia Court of Appeal has ruled that a shotgun clause in a shareholder’s agreement cannot be construed as revocable, considering the words and surrounding circumstances, nor has the pandemic caused frustration at law.

In Blackmore Management Inc. v. Carmanah Management Corporation, 2022 BCCA 117, Blackmore Management Inc., Carmanah Management Corporation, and Amphitrite Management Inc. each owned a third of First Light Technologies Ltd. (FLT). Carmanah and Amphitrite, the respondents, wanted to purchase Blackmore’s shares in FLT.

After failed negotiations, the respondents invoked the shotgun clause – a compulsory buy-sell provision of a shareholder’s agreement – where either the respondents purchase Blackmore’s shares, or Blackmore purchases the respondents’ shares. The clause had a 60-day election period.

Blackmore filed a petition for an injunction freezing the time for election because it wanted to obtain financing to purchase the respondents’ shares. The parties agreed to suspend the election period until the injunction was heard. Due to the suspension of in-person operations brought about by the COVID-19 pandemic, this agreement was later extended until the disposition of the case.

During this time, FLT’s shares increased in value.

Four months later, the respondents wrote to Blackmore revoking the shotgun offer. A month later, Blackmore delivered notice to the respondents electing to purchase the shares at the valuation stipulated in the offer. Blackmore later amended their petition seeking a declaration that the shotgun offer was not revocable, and consequently its election to purchase was enforceable.

Relying on the general rule that offers are revocable prior to acceptance, the trial judge concluded that the shotgun offer was not irrevocable and the agreement did not freeze the offer. This was the only issue on appeal.

The appellate court disagreed.

“Contractual interpretation is a practical, common-sense exercise to determine the objective intentions of the parties,” said the court. The mandatory language in “compulsory offer” was incompatible with the respondents’ argument that the offer led to the formation of a new contract, said the court.

Further, the commercial purpose of a shotgun clause is to force the sale of one shareholder’s interest in the company, and an interpretation that would allow this process to be unilaterally stopped is inconsistent with this objective, said the court.

Lastly, the appellate court rejected the respondents’ argument that the pandemic amounted to frustration at law. While the pandemic was unforeseen, it did not change the nature of the parties’ obligations, said the court.  “It is well-established that increased expense, hardship, onerousness, inconvenience, or material loss do not amount to frustration,” said the court.

Further, the court found that the respondents were content with the agreement until they became aware of FLT’s increased value. It must be assumed that the respondents considered the risks before making a shotgun offer, and it is inappropriate to “rescue them from a bargain they now regret,” said the court.

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