A shotgun clause can be useful if you need to end or modify a California business partnership. You’ll probably only need to use the option if you’ve tried everything else and the partner or partners are not willing to back out agreeably.
When you’ve run out of options
You might have heard this type of clause casually called a buy-sell agreement. It’s something that you can write into the shareholder agreement that governs your partnership from the start.
In some cases, a shotgun clause will force the partners into selling their stakes. Other times, you can get them to agree to buy out another offering partner. The agreement effectively serves as a conflict resolution as well as a pricing mechanism.
Doing what’s best for the business
Most of the time, you would use a shotgun clause if the strain in your partnership is damaging the business. The options for the person on the other end of this clause are to either buy out another partner who’s offering or else sell their shares of the company to that offering partner. You can use a single shotgun clause to force a sale or buyout on multiple partners.
The simplicity of a shotgun clause makes it seem like an attractive option. It’s supposed to provide a fair process, but many of those who have seen this agreement in practice find it to be inefficient and excessively forceful.
You might consider using a shotgun clause if two or more partners wish to have control of the business but don’t want to manage it as a team. When it comes to that, they may need something official to make one of them either buy or sell. This can both resolve the conflict and provide an effective and hopefully fair way to determine the pricing.