By Gordon Pitts
Argosy Partners pools capital that can be accessed quickly to match a bin when a partnership’s dispute resolution process is triggered.
Richard Liliani and Gordon Bennett were university pals and business partners, but then they quarrelled.
Last year, Mr. Bennett pulled out a shotgun, squeezed the trigger and sent Mr. Liliani reeling.
“You know it’s coming, but when it arrives, your life flashes before your eyes,” Says Mr. Liliani, 43, describing his bitter experience with the “shotgun clause,” the dispute resolution process written into many partnership agreements.
It was a classic case: the partners were fighting over strategy, Mr. Bennett bid for Mr. Liliani’s shares, and Mr. Liliani managed to match his price.
When the smoke cleared, Mr. Liliani was still chief executive officer and majority owner of Toronto-based Blockade Systems Corp., the Internet security company the two men had founded 10 years earlier.
Divorces are always traumatic, but the shotgun is the business equivalent of a custody battler over the kids. This confrontation is replayed over and over in small and big companies, when partners find themselves on the giving or receiving end of these buy-sell bids.
In the case of Blockade, Mr. Bennett, who had owned 40 per cent of the company, ended up a bit richer, but the payoff feels hollow.
“It was a disappointing end to my relationship with the company,” says Mr. Bennett, 41, a computer consultant who no longer keeps in touch with his old friend Mr. Liliani.
In the typical shotgun, one party initiates the buyout by setting a price for the other’s shares. The second party can choose to sell at that price or match the offer. By matching, the second partner gets to buy out the first and keep the company.
In theory, the process should guarantee a fair price. After all, the first bidder doesn’t know whether the offer will be accepted or matched. The problem is that shotguns are sometimes used as nasty power plays, says Richard Reid, a Toronto merchant banker.
“If you and I are partners, and you are sick or divorced or your broker is calling your margin, I can put in a low-ball offer,” Mr. Reid says.
With a typical 30- to 60-day period to respond, there is little time to muster funds for a matching offer, and a bid far below market price can win the day.
Mr. Reid and James Ambrose, who run Argosy Partners Ltd. of Toronto, believe this potential abuse creates a need for their new Shotgun Fund, a pool of capital that can be accessed quickly in response to a shotgun offer.
The fund’s advantage is specialization and speed. The partners claim to be able to give their answer to a request for funds within 48 hours, an alacrity that financial institutions can’t come close to matching, they say.
The fund’s fast response capability could be an advantage because shotguns have short fuses, says Gordon Sharwood, president of Sharwood & Co., a Toronto investment bank which serves mid-sized companies.
His firm and similar institutions can provide a similar service, he says, but the new fund is a welcome addition to the financing mix.
When a shotgun is “popped,” the fund’s normal role would be to support the receiving partner, and assume the equity position of the trigger-puller. It can provide bridge financing until a new strategic partner can be found, or come in as a longer-term partner for typically five years. In some cases, it may back the partner who initiates the bidding.
Mr. Reid and Mr. Ambrose have raised $10-million from a group of Ontario businessmen, including Sheldon Gross, CEO of Para Paints of Canada Inc., Ralph Zarboni, president of auto parts maker Tarxien Corp., and Don Jackson, a former president of Laidlaw Inc. and now a partner in a Toronto merchant bank. Some investors also serve on an advisory committee.
Mr. Gross of Para says he went through a shotgun experience about five years ago, and obtained financing from Mr. Reid, who then ran a mezzanine fund with Gordon Capital. “I believe there’s a huge market for this,” he says.
The Argosy partners say they are seeking an additional $20-million and have an indication of interest for $10-million from an institutional investor. The fund is shooting for a pretax annual return of 25 percent – a level which assumes the fund will typically buy in on “abusive” shotgun offers and sell out at fair market value.
The Argosy team is prepared to invest $1-million to $10-million in manufacturing, service and distribution companies with annual sales of $10-million to $100-million and a company value of $5-million to $25-million.
The marketing effort is targeting lawyers and accountants – the people whom business partners consult with their problems. Southern Ontario is the focus for now, but the fund could move beyond that.
“It’s for the little guy who doesn’t have great contacts with merchant banks, and needs a quick response,” Mr. Reid says.
After a shotgun offer, he says, “it takes the guy two to three days to collect himself, and how quickly can he get a meeting downtown where the money is?”
Mr. Liliani was able to get some meetings downtown and find his own backing through Toronto-based merchant bank Lawrence & Co. After buying out Mr. Bennett, he was able to attract additional venture capital backing this year, and now holds 36 per cent of Blockade.
Observers point out that a partnership dispute can discourage outside investment in a company. After the shotgun takes effect, investors may be more willing to come in – and to pay higher multiples for an ownership stake.
Mr. Liliani believes the new fund is useful because it makes a potential bidder think twice before coming in with a low offer. But he says Mr. Reid and Mr. Ambrose have to establish a track record, particularly in the ability to respond quickly.
As for the Argosy partners, do they have a shotgun clause? Mr. Reid replies that they do. “So who gets to use the fund?” Mr. Ambrose asks.