Shotgun still works

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A recent Ontario case illustrates that a shotgun offer doesn’t have to be perfect to be effective.

In the case of Western Larch Limited v. Di Poce Management Limited, the Ontario Court of Appeal considered whether an offer made by one group of partners (the “Triggering Partners”) under the shotgun clause in a Partnership Agreement was enforceable against the other partner (the “Receiving Partner”). The shotgun clause in the agreement provided, as one of the terms of a shotgun transaction, that the Partnership must repay all indebtedness owing by it to the selling partner on the closing of the transaction. The Triggering Partners drafted the shotgun offer so that there were two possible alternatives for repaying the indebtedness: (a) repay it in full on closing, as provided for in the agreement, or (b) repay it over a 4 year period with interest. If the Receiving Partner did nothing, the offer provided that it would be deemed to have accepted the offer to sell its interest and that alternative (b) would apply to repayment by the Partnership of its indebtedness.

During the offer period, the Receiving Partner tried to obtain financing to reverse the offer and buy out the interest of the Triggering Partners but was unsuccessful. It did nothing to formally respond to the offer. As a result, the Triggering Partners closed the purchase of its interest using powers of attorney in the agreement and invoked alternative (b) in repaying its indebtedness. The Receiving Partner then sued on the basis that the shotgun offer did not comply with the terms of the Partnership Agreement and should be found to be unenforceable as a result.

The court found that although a shotgun offer must comply strictly with the provisions of the agreement, “strict compliance” does not mean “perfect compliance”. The “commercially reasonable expectations of the parties” must be considered. Those expectations were met here because one of the debt repayment alternatives which was offered did comply with the provisions of the agreement. The court decided that the offer was enforceable on the basis of the alternative which required repayment of the indebtedness in full on closing and that this could be accomplished by calculating damages payable to the Receiving Partner for any loss it suffered as a result of the imposition of the 4 year repayment plan.

There were also other minor ways in which the shotgun offer didn’t strictly comply with the provisions of the agreement but the court found these were “commercially insignificant” and did not result in the offer being unenforceable. Again, the court found these could be compensated for by damages.

One sidebar – the real reason that the Receiving Partner was attempting to have the court find the offer unenforceable was to have the court then increase the price payable for its partnership interest to fair market value, instead of the price set in the shotgun offer by the Triggering Partners. This attempt was unsuccessful.

The takeaways from this case are clear:

  1. A shotgun offer does not have to be perfectly compliant with the provisions of the agreement under which it is made but it has to “meet the commercially reasonable expectations of the parties”.
  2. If, in regard to an important term, the offer includes an alternative which does not comply with the agreement, that will not result in the offer being unenforceable as long as a compliant alternative is also included.
  3. If any terms of the offer are not compliant and also do not offer an alternative which is compliant, the offer can still be enforceable if those terms are “commercially insignificant”.
  4. Each situation will need to be examined on the basis of the shotgun language in the agreement and on its own facts to assess whether an offer meets the “commercially reasonable expectations of the parties” and whether any non-compliant terms in the shotgun offer are “commercially insignificant”.