By Jim Middlemiss
When Orestes Pasparakis’ client had a shotgun clause pulled on him one Sunday afternoon, the corporate litigation partner at Ogilvy Renault in Toronto had less than 30 days to help his client come up with the funds to meet the price or see his client lose his business to another shareholder.
Pasparakis turned to the Shotgun Fund, the creation of a couple of Bay Street financiers designed to assist business owners who either find themselves staring down the barrel of a shotgun clause or want to pull the trigger.
A quick 10-minute call to the fund produced a meeting a day later. “Within 24 hours, we knew we were going to do a deal,” says Pasparakis. “They provide a service that can be invaluable. It’s really an arrow in your quiver.”
The Shotgun Fund is the brainchild of Richard Reid and Jim Ambrose, partners in Argosy Partners Ltd., the general partner of the fund, which has pulled together a group of investors wiling to wade into the messy affairs of partnerships gone bad.
Reid, a former partner in Gordon Capital, got the idea for the fund while at Gordon, when a client who had a prosperous business had a shotgun clause pulled on him. The bank that had agreed to finance the owner got cold feet at the last minute, leaving the owner scrambling to find funds.
At the time, Reid managed the $50-million Canadian Mezzanine Fund for Gordon, which invested in firms that had a few rounds of venture capital funding, but before they went public. He was able to secure financing and that deal later provided a template for the Shotgun Fund when Reid left Gordon and formed Argosy.
He saw an opportunity to step into a funding breach when partners are in dispute and have exercised a shotgun, a provision in a shareholder’s agreement that allows one party to take out the other. The firing shareholder states a price per share at which he will either buy out the other partners or be bought out, depending on how the other partner responds.
“We have seen most of the shotguns that have gone off locally,” Reid says from his Toronto office. But that doesn’t mean the all turn into investments. The firm has invested in only a handful of deals since it was started in 1999.
Part of that reason is because of its “pretty disciplined” investing criteria, Reid says.
Also, it’s not every day that a shotgun is pulled. The firm looks for businesses that have sales of $10 million to $100 million and are typically valued at between $5 million and $20 million. They must be profitable and ideally in the manufacturing or services sector, not oil and gas or real estate.
Typically it’s a situation where there are two or three partners who are in dispute and the fund can handle multiple shotguns, which Reid notes can get complex.
Reid believes the fund is the only one of its type in North America, and he gets queries from as far away as the U.S. and Europe. “Often we see both sides of the shotgun,” he says, explaining that “it’s important [for lawyers] to get us first.”
Richard Bain, a corporate lawyer with Robins Appleby & Taub, who advises the fund on transactions, says lawyers are often faced with the problem of how do we respond to a shotgun we’ve received.
There’s “limited time” and he says one of the fund’s appeals is its ability to respond quickly. That’s because it’s “not bureaucratic,” with the “result that a decision can be taken to say yes or no within a matter of hours.”
Reid says the firm can respond quickly because of a template list of questions it has developed that it uses to assess a deal and he’s particularly proud of the firm’s ability to say yea or nay quickly.
“We can let you know within 48 hours if we’re interested and are capable of doing a deal within a five-day time frame.”
The fund’s literature stresses that it’s not an operator. Rather, it leaves that task up to the shareholder that’s left standing at the end of the day.
What it wants to do is step into the shoes of the departing shareholder and hang around for up to five years letting the owner manage the business.
When a shotgun is triggered, it’s usually because “one party is trying to take advantage of another party at a weak moment” and there’s a power imbalance, Reid says. It could be an instance where a shareholder is going through a divorce and they’re strapped financially or a sickness or even a collapsed stock market that has left a partner short of funds to fend off a shotgun. “We level the playing field.”
Reid says it’s his experience that once the “smoke has cleared” and the ownership dispute is settled, “often the business starts performing better. The malaise is gone.”
Shotgun clauses work best when the parties are on equal footing, he says, which is why the fund doesn’t use them in its own arrangements with its new shareholders.
Reid says that while such clauses are not an “anathema” they can be very helpful in a partnership dispute “because they ensure something will happen.”
However, he notes, they’re all over the map when it comes to drafting. He says that lawyers who draft them need to keep them simple and include penalties for not closing, because it “makes the clause real.”
Bain agrees that he’s seen some “pretty bad ones” with “funny language” that “you don’t want to see.” He warns that “in my experience, the guy who pulls the shotgun is going to be the seller. If he pulls the trigger, he’s going. I’ve seen that time and again.”
In Pasparakis’ case, his client won out over the trigger-finger-happy partner. What he found appealing about the fund is that the principals are “not afraid of getting into something that’s turned ugly and trying to straighten it out.”
“That’s what fresh capital can do. They have an understanding of the litigation risks and will go into a situation where other lenders simply won’t.”