When shareholders cannot agree and the conflict is deemed irresolvable, they may want to sell their shares.
You can preempt this deadlock and include either a Texas Shootout or a Russian Roulette clause in your operating agreement or shareholders agreement as a solution.
For example, shareholders A and B hold 50 shares each in Comp Ltd. They fall out. Then, A proposes a sale. The clauses of their agreement can determine the next steps.
What is a Russian Roulette Clause
A Russian Roulette clause allows a share buy-out in a deadlock but ensures that parties produce legitimate offers.
Shareholder A offers to transfer all their shares to Shareholder B at a price of A’s choosing.
Shareholder B then must accept the offer and buy A’s shares at the specified price or sell all their shares to A at the same price per share.
By adding the risk of turning the offer back on B, A must demand a fair price for their shares or
pay more than they are worth. It also encourages the parties to negotiate thoroughly to explore all their options before one triggers the clause.
What is a Texas Shootout
This clause is also known as a Mexican shoot-out. It adapts the Russian Roulette provision where Shareholders A and B want to buy each other’s shares. They both submit unknown bids to an independent ‘auctioneer’, and whoever makes the higher bid buys the company at that price.
When to Use a Russian Roulette or Texas Shootout Clause
Texas Shootout and Russian Roulette Clauses only operate fairly if the parties have approximately equal financial strength, the shares are affordable, and neither has a unique role in the company.
If these provisions are not appropriate mechanisms, the shareholders’ agreement can also provide a valuation of the shares and facilitate a sale to the remaining shareholder(s) or the outside world.
Instruct our Solicitors Today
If you want to resolve your shareholder dispute or write appropriate clauses into a shareholders’ agreement, contact our team today. We will arrange a free consultation.
