Key points
- The buy-or-sell clause, included in the shareholders’ agreement, organises the sale or purchase of shares in the event of a dispute or a reorganisation of the share capital.
- It allows one shareholder to give notice of a price per share; the other shareholder must then choose either to sell their own shares to the initiator or to buy the initiator’s shares, at that same price.
- Its key features are a single-price offer, valid for both a purchase and a sale, and an option left to the recipient within a period set by the agreement.
- Under the American clause, the recipient of the offer must either sell their shares at the proposed price or buy the initiator’s shares at the same price.
- The Texan clause organises successive bids, the highest bidder buying out the other’s shares, while the designated third-party clause entrusts the valuation to an independent third party.
- It resolves deadlocks, particularly between equal shareholders, and offers an organised exit; it must be handled with care when the shareholders’ financial resources are unequal.
You are a director or shareholder of a company, and internal disputes concern you. You may be anticipating complex situations: strategic disagreements, the sudden departure of a shareholder, or even a succession. A solution exists to preserve stability: the buy-or-sell clause. This provision, included in the shareholders’ agreement, structures an orderly exit. You thus limit the risk of long and costly court proceedings.
Drafting this clause may seem complex, but it meets concrete needs. Avoiding decision-making deadlock, protecting your interests and keeping control within the company remain your priorities. You are therefore looking for a clear, adaptable and legally sound approach to handle these delicate situations. Find out how a well-designed buy-or-sell clause supports smooth share transfers and protects the interests of all shareholders.
What is a buy-or-sell (shotgun) clause?
The buy-or-sell clause, also called a shotgun clause in Anglo-American practice, is a provision often included in shareholders’ agreements. This clause manages the sale or purchase of shares in the event of disputes between shareholders or unforeseen situations that require a reorganisation of the company’s share capital.
In practice, the shareholder who triggers the clause, in the event of a deadlock or another event provided for in the agreement, gives the other shareholder notice of a price per share. The recipient then chooses, within the set period, either to sell their shares at that price or to buy the initiator’s shares at the same price. This mechanism encourages the initiator to propose a fair price, since they do not know whether they will end up as buyer or seller.
The main features of the clause
- Single offer: the shareholder who triggers the clause gives notice of a price per share, valid for both a purchase and a sale.
- Defined price: the price of the shares to be sold must be set clearly and generally according to a predefined mechanism.
- Recipient’s option: the other shareholder has a period in which to choose to buy or sell at the proposed price; the agreement must provide for the outcome if they remain silent.
When should you use a buy-or-sell clause?
Including a buy-or-sell clause in a shareholders’ agreement proves useful in various situations:
Disputes between shareholders
When major disagreements arise between shareholders and threaten the stability of the company, this clause provides a clear and structured exit solution. It thus limits the risk of long and costly court proceedings.
Share transfers
When a shareholder wishes to leave the company, the clause offers an organised exit route between shareholders, without seeking an outside buyer, which limits the entry of potentially unwanted new partners.
Types of buy-or-sell clauses
There are several variants of the buy-or-sell clause, each suited to specific contexts:
American clause
In this model, shareholder A gives notice of a price per share. Shareholder B must then choose either to sell their shares to A at that price or to buy A’s shares at the same price. This mechanism encourages the parties to propose a realistic and fair price.
Texan clause
A variant based on bidding: instead of accepting A’s price, shareholder B may propose a higher price to buy A’s shares; bids follow one another until one of the shareholders gives up, the highest bidder buying out the other’s shares.
Designated third-party clause
Here, an independent third party values the shares, as permitted by Article 1592 of the French Civil Code (Code civil) (in French). This supports an objective valuation and limits strategic overbidding or undervaluation.
Practical examples and benefits
Let us now look at how these clauses work in practice and what their main benefits are for companies.
Resolving a deadlock
Take a company in which two shareholders each hold 50% of the share capital. A disagreement arises over a strategic decision. The buy-or-sell clause can resolve this deadlock by allowing one of them to buy the other’s stake at a price considered fair.
Protecting shareholders’ interests
This provision also offers a way out in the event of a lasting disagreement. It must, however, be handled with care: the shareholder with fewer financial resources may be forced to sell, for lack of the means to buy. The agreement may provide for suitable payment terms to rebalance the situation.
Simplifying successions
If a shareholder dies, the agreement may provide for the surviving shareholders to buy back the shares according to a price mechanism defined in advance. The heirs then have an organised exit, without disrupting the day-to-day management of the company.
Implementation mechanisms
Applying a buy-or-sell clause requires a few key administrative and legal steps:
Inclusion in the shareholders’ agreement
First of all, the clause must be set out in black and white in the shareholders’ agreement. The precise conditions of implementation must be detailed, in particular how the price is determined and the time limits for each step.
Financing
Shareholders must plan how to finance the buyout, for example through a bank loan, since each of them may end up as the buyer.
Legal framework and tax
The legal and tax aspects of the buy-or-sell clause must not be overlooked. No statute specifically regulates it: it falls under contract law. The price must be determined by the parties or by a mechanism provided for in the agreement (Article 1591 of the Civil Code (in French)), or left to the valuation of a third party (Article 1592), and the clause must be consistent with the articles of association.
Tax on the transactions
Sales or purchases of shares have tax consequences. In France, a capital gain on the sale of shares made by an individual is in principle subject to the flat rate of 12.8% under Article 200 A of the French Tax Code (CGI) (in French), plus social levies, unless the taxpayer opts for the progressive income tax scale. Holding-period allowances now only apply to shares acquired before 1 January 2018, where the progressive scale is chosen (Article 150-0 D of the CGI).
Consistency with the articles of association
If the articles of association contain an approval or pre-emption clause, the buy-or-sell clause must be consistent with it to avoid any later dispute.
| Type of clause | Description |
|---|---|
| American clause | One shareholder proposes a price for their shares; the other must buy or sell at that price. |
| Texan clause | The shareholders bid successively; the highest bidder buys out the other’s shares. |
| Designated third-party clause | A neutral third party sets the value of the shares to be sold or bought. |
Practical tips for drafting the clause
To draft an effective buy-or-sell clause tailored to your company’s needs, here are a few recommendations:
Clarity and precision
Make sure the clause is drafted precisely. Every term and condition must be clear to avoid diverging interpretations.
Anticipating possible scenarios
Take into account as many potential situations as possible: internal disputes, voluntary departure of a shareholder, death, etc. Adapting the clause accordingly gives better protection to all stakeholders.
Consulting experts
Do not hesitate to consult a lawyer to check that the clause is compliant and effective. An expert can provide valuable advice and help prevent costly mistakes.
The buy-or-sell clause is a valuable tool for companies seeking to protect their internal relationships and anticipate unexpected changes. Applied judiciously, it helps preserve harmony between shareholders and keeps the management of shares running smoothly.
