What is a Shotgun Clause?
A shotgun clause is a provision within a contract that allows one partner to offer his or her interest in a business venture to one of the other participating partners. As an example of what is known as a buy-sell provision, the clause further goes on to commit the participating partner to sell his or her interest to the offering partner at the same rate, if the initial sale is rejected. Clauses of this type are relatively common in situations where investors come together to launch a new business venture, and wish to ensure that those participating in the venture are committed to making the project a success.
The underlying reason for the inclusion of a shotgun clause or provision within a joint venture contract is to ensure that no partner can sell his or her interest in the joint venture for less than a specified amount. By establishing limits of this type, the opportunity to at least recoup the original investment is much more likely. At the same time, no partner can offer less than a credible amount in an effort to acquire the interest of another partner. Depending on any local laws or regulations that apply to the content of partnership contracts, the text may include a process for calculating what would be considered a reasonable minimum offer.
One other benefit of the shotgun clause is that it tends to maintain a degree of stability with the funding of the joint venture. It is not unusual for many strategic alliances of this type to place limits on selling interest to anyone outside the limited partnership. When this is the case, creating a situation where the partners must sell interests among themselves goes a long way to ensure a long-term commitment by investors. This in turn can help maintain a steady cash flow while the venture moves closer toward profitability. Even if the terms of the contract are worded to require that all partners have the first right of refusal, there is a good chance that a shotgun clause or provision or clause will also be present, as an added means of keeping the business interests within the group.
The inclusion of a shotgun clause in a partnership contract can also aid in qualifying investors for participation in the venture. Any prospective partner who feels uncomfortable with this type of provision can determine if the potential return on the venture is worth the risk of the clause being invoked from time to time. If not, then he or she can simply decline to become part of the partnership, and look for other business opportunities.
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