Substantive Legal Content

Two Stupid Clauses Dumb Lawyers Put in Shareholders Agreements

Over my many years practicing business law I formed some strong opinions. Here are two of them which relate to shareholders agreements:

1. When a shareholder is required to sell their shares under a shotgun buy-sell clause, the agreement must provide that the purchaser and the corporation are required to obtain a release of any guarantees that the seller provided to the Bank.

A requirement limited to using ‘reasonable commercial efforts’ or ‘best efforts’ accompanied by a promise to indemnify the seller if the release cannot be obtained is ridiculous. I have had lawyers argue with me about this and say that the most important thing is that the agreement provides for a transaction which can be completed, whether or not the release is available. To which I say that if you do not have the money to purchase the shares and obtain a release (i) you have no business starting a shotgun transaction; and (ii) if you are on the receiving end of the shotgun, you should not be purchasing.

No seller should have to look over their shoulder for years after the transaction waiting to see if they are going to be sued when the purchaser runs the company into the ground (which every seller in a shotgun is sure is going to happen eventually.)

2. The agreement should never require the shareholders to exchange mutual releases upon the closing of a shotgun transaction. If my partner has been doing something evil for which I or the corporation have the right to sue, I should not be faced with the dilemma of having to decide between (i) suing them while we are both still partners; or (ii) instituting the shotgun (or other sale transaction) and losing all rights to sue.

I have had other lawyers argue with me about this, saying that it is important that the shareholders be able to separate “with a clean slate.”  I think that is crazy talk. It just encourages someone who has been acting dishonestly to avoid liability by starting a sale transaction under the agreement or provoking the other side to do so.

There you have it. Two technical points which some lawyers just do not seem to get. Of course, the other super unlikely hardly worth contemplating possibility is that I am wrong. (By the way, in the right circumstances for a particular client, I have been known to argue the exact opposite. Practicing law is like that.)

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