Buy-sell and shotgun clauses in Ontario shareholders’ agreements

What these clauses are for

Owners of a private company cannot usually sell their shares on a market. The articles normally restrict transfers: Ontario’s standard incorporation text, for example, says no shareholder may transfer shares without the approval of the directors or of a majority of the shareholders. That protects the owners from strangers, but it also means an owner who wants or needs to leave can be stuck. Buy-sell and shotgun clauses, written into a shareholders’ agreement, solve that problem in advance.

A buy-sell clause says what happens to an owner’s shares when a defined event occurs, such as death, long-term disability, retirement, termination of employment or a serious breach of the agreement. It sets who must or may buy, how the price is fixed and how it is paid. A shotgun clause, sometimes called a buy-sell offer, is a way to break up the ownership: one owner names a price per share, and the other must either sell their shares at that price or buy the first owner’s shares at the same price.

These are contract terms. The Business Corporations Act (the OBCA) does not prescribe them, so what each clause does depends on its exact wording. The Act does set rules that the wording has to work with, which this page points out. The rest of what a shareholders’ agreement covers is on our shareholders’ agreements page.

How a shotgun clause usually runs, step by step

1. A triggering condition is met. Many agreements allow a shotgun only after a waiting period, or only on deadlock, so it cannot be used the week after the company is formed.
2. One owner makes the offer. The offering owner sends written notice naming a price per share and the terms of payment.
3. The other owner chooses. Within the time the agreement sets, the receiving owner must either accept and sell, or buy the offering owner’s shares at the same price.
4. Silence decides it. If the receiving owner does not respond in time, the agreement often treats that as acceptance of the offer to sell.
5. The deal closes. The price is paid, the share transfer is approved and recorded in the securities register and register of transfers (OBCA s. 141), and resignations are delivered if the departing owner was a director. Keeping those records complete is part of what goes in an Ontario corporation’s minute book.

The logic is fairness by design: the owner who names the price does not know which side of the deal they will end up on, so they have a reason to name a fair one. The weakness is that it favours the owner with ready access to money, because naming a price that the other side cannot finance can force them out. That is why some agreements limit when a shotgun can be used or pair it with other exit routes, such as a right of first refusal or a mediation step before any offer. The shareholders’ agreements section of our corporate law page lists the other exit and deadlock terms owners usually consider alongside it.

Who buys: the other owners or the company

A buy-sell clause can make the other shareholders the buyers, or the company itself. The difference matters legally as well as for tax.

When the company buys its own shares, section 30(1) of the OBCA allows it, subject to its articles, but section 30(2) prohibits the payment if there are reasonable grounds to believe the company is, or after the payment would be, unable to pay its liabilities as they become due, or that the realizable value of its assets would then be less than its liabilities plus the stated capital of all classes. Section 31 relaxes that test for some purchases, including fulfilling a non-assignable agreement to buy shares from a current or former director, officer or employee, but section 31(3) still applies a solvency test. Redeemable shares follow section 32, with its own solvency test in section 32(2).

A clause that says “the company shall buy” therefore cannot override those tests. A well-drafted clause says what happens if the company cannot lawfully pay, for example by spreading payments over time or shifting the obligation to the other owners. Which route is better for tax is a question for your accountant.

What changes the answer

How the price is set

The most common sources of disagreement are valuation and timing. Agreements typically use a formula, a value the owners agree and update each year, or an independent valuator. An agreed value that nobody has updated in years can produce a price far from what the shares are worth.

How the purchase is funded

Death and disability buyouts are often funded with insurance on each owner, owned either by the company or by the other owners. In general terms, insurance means the money is more likely to be there when the estate needs it. The structure of the policies and the tax treatment of the proceeds are questions for your insurance advisor and accountant, and the agreement should match what they set up.

Whether it is a unanimous shareholder agreement

If the buy-sell terms sit in a unanimous shareholder agreement, section 108(4) of the OBCA deems a transferee of the shares to be a party, so a buyer or a new shareholder is bound. The rules on who is bound are in what is a unanimous shareholder agreement.

Your will and power of attorney

A buy-sell clause often decides what happens to your shares on death more directly than your will does: your estate receives money instead of shares. The will and the agreement have to agree, as explained in estate planning for business owners. If you lose capacity, the person you name in a continuing power of attorney for property may be the one who has to act on a disability buyout, so that document should give them clear authority. Some owners also hold their shares under a secondary will for private company shares.

Selling the whole company instead

A buy-sell clause moves shares between owners. Selling the business to an outside buyer is a different exercise, compared in asset sale or share sale.

Common mistakes

• A stale agreed value. If the annual valuation is never updated, the price on death or exit may be badly out of date.
• A shotgun with no limits. It can let the owner with more cash force the other out at a low price.
• Ignoring the company’s solvency. A company buyback cannot be paid if it fails the OBCA solvency test.
• Insurance that does not match the agreement. The owner, beneficiary and amount of each policy should fit the buyout terms.
• A will that leaves the shares to family anyway. If the agreement requires a sale, the family will receive the price, not the shares.
• No deadline for choosing. A shotgun or buy-sell without clear time limits invites delay and dispute.

What to do this week

1. Find your shareholders’ agreement and list every event that triggers a purchase.
2. Check how the price is set and when the agreed value was last updated.
3. Confirm who buys in each case: the other owners or the company.
4. Check that any insurance policies match the buyout terms.
5. Read your will and power of attorney against the agreement.
6. Review the full list of clauses in what a shareholders’ agreement should cover.
7. If the agreement needs updating, a first consultation takes 30 minutes, by video or in person, and you can request one here.

Frequently asked questions

Sources

• Business Corporations Act, R.S.O. 1990, c. B.16, ss. 30, 31, 32, 67, 108(4) and 141
• Ontario: Notice, Incorporating a Business Corporation (predefined restriction on share transfers)

This page is general information about Ontario law, not legal advice for your situation. It reflects the law as of October 26, 2026.