M&A Vocabulary – Understanding Experts “Russian-Roulette and Texas-Shoot-Out”

The term Russian-Roulette clause generally refers to clauses that are structured according to the “buy or sell” principle: a shareholder can offer to purchase the shares of his co-shareholder at any time or only under certain conditions, specifying a specific purchase price. If the co-shareholder does not accept this offer, he is obliged to sell his shares to the shareholder initiating the procedure at the same purchase price. This creates an incentive to make a realistic offer, because otherwise the initiator exposes himself to the risk of a sale.

Another possible variation of a Russian Roulette clause is for the shareholder initiating the procedure to submit two offers to the co-shareholder: one to purchase the co-shareholder’s shares and one to sell his own shares to the co-shareholder. The co-shareholder must then accept one of the two offers within a certain period of time.

In a Texas-Shoot-Out, one shareholder can make an offer to purchase the shares of its co-shareholder. The co-shareholder can accept this offer or, in turn, make an offer to purchase the shares of the shareholder initiating the process at a higher purchase price. If both parties wish to acquire the shares of the other party, a bidding process can be initiated. Typically, the shareholder agreement limits the number of bid increases in order to prevent the bidding process from getting out of hand.

Other types of exit clauses include the Mexican-Shoot-Out and the Deterrent Approach.

The Mexican-Shoot-Out involves both shareholders submitting a confidential purchase offer for the other shareholder’s shares to an uninvolved third party (notary or arbitration board). The higher offer must then be accepted.

The Deterrent Approach determines the objective market value of the shares using a predetermined benchmark. The shareholder initiating the procedure must then offer their co-shareholder the sale of its shares at a fixed discount on the market value determined in this way and, at the same time, offer to purchase the co-shareholder’s shares at a corresponding fixed premium. The co-shareholder is then free to decide whether to sell its shares at these conditions or to purchase the shares of the shareholder initiating the procedure. The discount or premium is intended to encourage the parties not to initiate the procedure lightly.

Admissibility in contract drafting

Exit clauses of this kind are generally admissible, provided they do not violate mandatory legal prohibitions, such as the prohibition of termination clauses, or fundamental principles of freedom of contract. As a rule, such clauses contain an exit procedure agreed upon on a voluntary basis, and the decision on the exit of a shareholder due to a deadlock is left to the shareholders involved, which means that an objective justification can be assumed. In some cases, however, with regard to an objective justification, it is required that specific triggering events be agreed upon in advance.

Practical advice

Before including a Shoot-Out clause, it is always advisable to check whether the parties involved have the financial capacity to bear the consequences of a transfer. It is recommended to define clear triggers that specify the circumstances under which the chosen procedure can be initiated. A provision on pricing or review should also be firmly agreed upon.

Conclusion

Russian-Roulette and Texas-Shoot-Out clauses in shareholder agreements are effective tools for resolving deadlocks. The sole inclusion of such clauses creates leverage that often causes shareholders to reconsider their position in the conflict. The risk of abuse associated with such clauses should not be overlooked, particularly when the partners are in unequal economic positions. However, this risk can be significantly reduced through careful contract drafting.

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