An Update: Rights of First Refusal, Shot-Gun, and Drag-Along Clauses — What Are We Talking About Anyway?

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Shareholder agreements often provide buyout mechanisms by which shareholders can control the disposition of shares. While well-drafted buyout mechanisms can protect shareholder interests and prevent disputes, they can also create unanticipated obligations on shareholders that give rise to litigation. This paper discusses three common buyout mechanisms: Rights-of-First-Refusal, Shot-Gun Clauses, and Drag-Along Clauses. Background information and principles of interpretation are discussed for each mechanism, as well as a review of relevant case law. Litigation issues that have arisen from buyout mechanisms are identified, and ways to improve strategies when relying upon, enforcing, and drafting buyout mechanisms are highlighted.

This paper is part of a collection presented at LESA’s Advising Small & Family Businesses program in Edmonton on February 6, 2019 and in Calgary on February 13, 2019.

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