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Shot Gun as a deadlock resolution mechanism in shareholders agreements

30/11/2018

Among the mechanisms for resolving deadlocks in shareholder agreements, there is the possibility of structuring a shotgun clause, a mechanism derived from the North American practice and also known as buy-or-sell or Russian Roulette, referring to the purchase and sale of shares – with respect to the rights to dispose of the assets in case of an eventual deadlock between shareholders.  The mechanism establishes that one party may offer the other the option to buy or sell its shares, having both options the same price. In this way, one party leaves the company, and in doing so allows the other party to conduct business he/she sees fit.

In this format, a fair and equitable solution is reached. Concurrently, by ways of concentrating all the shares on one single party, the return of social harmony is achieved, considering that conflicts affect not only the relationship between shareholders but also the company’s business performance.

There is no law in Brazil that restricts or requires a predetermined format to be adopted by the shareholders in drafting the shot gun clause, therefore, it is lawful for investors to freely establish all the terms and conditions that must be respected for the exercise of the put options, arising from the shot gun clause.

Thus, the shot gun clause represents a contractual form of conflict resolution, specially the deadlock situations. However, its application and the way it should be structured should be analyzed on a case-by-case basis.

Candido Martins Advogados is at your disposal should you need any clarification.