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In the recent decision in Western Larch Limited et al. v. Di Poce Management Limited et al, the Court of Appeal for Ontario has ruled that, to be enforceable, a shotgun buy-sell offer must comply strictly with the shotgun provision in the authorizing agreement, but has also ruled that strict compliance is not perfect compliance.  The Court of Appeal ruled that, in deciding whether a shotgun buy-sell offer meets the strict compliance test, the commercially reasonable expectations of the parties in all the circumstances must be considered.

Shotgun buy-sell provisions are often found in Partnership Agreements and Shareholders Agreements and allow a partner or shareholder in a business venture to offer to purchase the interest of another partner or shareholder at a specified price; the other partner or shareholder must either accept the offer or purchase the offeror’s interest at the same price.  The time period within which the other partner or shareholder must decide whether to accept the offer and sell, or purchase the offeror’s interest is generally very short.

Shot-gun buy-sell provisions are typically triggered in situations where the relationship between partners or shareholders in a business venture has severely deteriorated and their purpose is to minimize the negative impacts on a business of a long drawn out legal battle between the owners over control of the business.

The shotgun buy-sell provision at issue in the Western Larch case was contained in a Partnership Agreement entered into in 1997 by the five corporations that were the partners of Alpa Partnership, which was in the business of manufacturing and distributing wood products for the low-rise residential building industry in Ontario.

The principal of one of the partner corporations, Mr. Maclver, had primary responsibility for the partnership's financial and corporate affairs, but relations between the other partner shareholders and  Maclver deteriorated over time.

The death in 2009 of the principal of one of the partner corporations, and the resulting disagreement between Maclver and the other partner shareholders about whether or not to buy out the deceased's interest, led to the other partner corporations delivering a shotgun buy-sell offer to Maclver's corporation, Western Larch.

The shotgun buy-sell offer presented to Maclver and Western Larch by the other partner corporations contained two alternatives, one which would have repaid the partnership's debt to them on closing, as required by the Partnership Agreement, which was referred to as Alternative 2, and Alternative 1 which provided for repayment of only half of the debt on closing, with the balance to be paid over four years together with interest. The shotgun offer also provided that if Maclver and Western Larch did not choose between the alternatives and did not elect to reverse the buy-sell offer, they would be deemed to have agreed to Alterative 1.

The Court of Appeal noted that Maclver did not initially complain about the form of the buy-sell offer when he was presented with it, but that instead, he had tried to secure financing so that Western Larch could reverse the offer and buy out the interests of the other partner corporations. It was only after his efforts in this regard were not successful and he was facing the forced acquisition of his corporation’s interest in the partnership that he and Western Larch Limited attacked the validity of the buy-sell offer by bringing the court action.

Maclver and Western Larch Limited were unsuccessful in their attempt to obtain an injunction to restrain the other partner corporations from implementing the buy-sell offer and the other partner corporations then carried out the forced acquisition of Western Larch's interest in the partnership in accordance with Alternative 1 in the buy-sell offer.

Having completed the forced acquisition of Western Larch's interest, the other partner corporations then sought to have the action dismissed, which Maclver and Western Larch resisted by arguing that the law required the buy-sell offer to comply strictly with the shotgun provision in the partnership agreement and alleged that there were numerous deficiencies, including the alternative offers, so that it was not open to the other partners to enforce it.

The judge hearing the motion, however, disagreed, finding that Alternative 2 in the buy-sell offer complied with the shotgun buy-sell provision in the Partnership Agreement and that, as a result, even though Alternative 1 was not compliant, the buy-sell offer as a whole was valid.  The motion judge held that the inclusion of the provision forcing the closing based on the non-compliant Alterative 1 did not invalidate the buy-sell offer and render it unenforceable.   Instead, the motion judge held that the imposition of the non-compliant Alternative 1 on MacIver and Western Larch led only to a claim by Western Larch for damages arising from the closing having taken place on the basis that it was not paid the debt owed to it by the partnership in full on closing.

The Court of Appeal in dismissing the appeal of Maclver and Western Larch agreed with the lower court, holding as follows:

The court will not enforce a shotgun buy-sell offer, such as Alternative 1, that is not strictly compliant with a shotgun buy-sell provision. It will enforce a compliant shotgun buy-sell offer, such as Alternative 2. This accords with the commercially reasonable expectations of the parties.

The Court of Appeal also rejected the argument of MacIver and Western Larch that the other partner corporations had secured an advantage by purporting to purchase Western Larch’s interest on the non-compliant terms contained in Alternative 1, holding as follows:

The appellants argue that by purporting to force the closing in line with Alternative 1, the respondents did secure an advantage that was not contemplated by the shotgun buy-sell provision in the PA - the effective expulsion of the appellants in a non-compliant manner. I disagree. The expulsion was accomplished by the operation of the shotgun buy-sell provision and the enforcement of Alternative 2. As the motion judge found, in view of the minor deficiencies, compliance is best effected, and the breaches of the shotgun buy-sell provision are best addressed, through damages. I agree.

With respect the other elements of non-compliance alleged by Maclver and Western Larch, the Court of Appeal found that they were commercially insignificant and therefore did not invalidate the buy-sell offer and render it unenforceable, holding as follows:

The motion judge fully and carefully considered the evidentiary record, and boiled down the evidence. At the end of that exhaustive exercise the motion judge found only three damage claims that warranted a trial. I agree with the motion judge that the elements of non-compliance were, in this particular factual context, commercially insignificant, and can be fully and fairly remedied by damages.

In my opinion, the buy-sell offer is sufficiently compliant with the shotgun buy-sell provision in the PA to meet the strict compliance standard. As I have said, strict compliance is not perfect compliance. Neither the law, nor the requirements of commercial certainty in this area, requires perfect compliance.

In rejecting the appeal of Maclver and Western Larch, and holding that the buy-sell offer was sufficiently compliant with the shotgun buy-sell provision in the Partnership Agreement to be enforceable even though there was not perfect compliance, the Court of Appeal pointed to the sophistication of the partners of the Alpa Partnership and held as follows:

The members of this partnership are sophisticated and experienced business people who operated a successful and complex business for many years under a comprehensive PA. It appears that they have been assisted throughout by legal and other advisors. The PA contemplates the event of a falling out among the partners, since it contains a shotgun buy-sell provision, which was described, by the two experienced Commercial List judges who heard the injunction motion and the summary judgment motion, as well-drafted and carefully designed.

It seems to me that the court should be reluctant to rescue a party who later regrets contractual arrangements that were carefully designed and accepted. The court's task is to consider whether compliance with the shotgun buy-sell provision is sufficiently strict, given the vagaries and complexities of commercial arrangements and commercial life, which the parties have plainly accounted for in their contractual arrangements. Strict compliance is not perfect compliance.

I agree with the motion judge's exposition, at paras. 109-111, of the relevant principles of contract law, and I will not repeat them here. In my view, in deciding whether the respondents' shotgun buy-sell offer met the strict compliance test, the commercially reasonable expectations of these sophisticated parties in this factual context must be considered.

The Court of Appeal’s decision in the Western Larch case provides important guidance to parties to Partnership Agreements or Shareholders Agreements that contain a shotgun buy-sell provision.  Parties seeking to trigger the shot-gun provision by serving a shotgun buy-sell offer on another partner or shareholder must ensure that the offer is compliant with the shotgun buy-sell provision in the authorizing agreement, failing which the offer may not be enforced and the party serving the non-compliant offer may become subject to a claim for damages.

Conversely, a party who has been served with a shotgun buy-sell offer should not expect to be able to avoid the consequences of the offer by asking the Court to invalidate the offer on the basis of any non-compliance in the terms of the offer or how it was implemented.  The Western Larch decision demonstrates that strict compliance need not be perfect compliance and that the court will enforce a shotgun buy-sell offer containing elements of non-compliance that are, in the particular factual context, commercially insignificant, and which can be fully and fairly remedied by damages.

Ron Segal is a partner at Blumberg Segal LLP practicing commercial litigation, including shareholder disputes, oppression remedy disputes as well a corporate commercial law.  Ron can be reached at rsegal@blumbergs.ca or 416-361-1982.