9003 / What is a “showdown clause” in the context of a buy-sell agreement? When should one be used?

A showdown clause, also known as “shoot out,” “slice-of-the-pie,” “Russian roulette” or “Chinese wall” clauses, essentially allows one party to name a price upon the occurrence of a triggering event under a buy-sell agreement. Upon occurrence of the triggering event, one party specifies a price at which the party would buy (or sell) the business interests at issue, and the others decide whether to buy the interests (or sell their interests) to the naming party.

When a business owner invokes a showdown clause, this is essentially expressing a decision to exit the business. This provision works best if both sides are in an equal financial position because, if the parties are on unequal footing, the clause may provide a route for one owner to unjustifiably “chase out” a co-owner from the business. A showdown clause is frequently invoked in a situation where a deadlock in management or another similar issue exists among the various business owners that cannot be resolved through other methods.¹

In Wilcox v. Styles,² a showdown clause was enforced by the courts, leading to an eventual dissolution of the business due to a deadlock over management issues that occurred between the two business owners of a closely-held corporation. The court upheld both the agreement containing the showdown clause and the pricing specified under the agreement, which was supported in part by an independent expert appraisal. The court in this case emphasized the importance of the written agreement—a mere oral agreement would be insufficient.³