The Good, The Bad and The Ugly Question

I have a quetsion about The Good, The Bad and The Ugly.

What do you do when all of the remainin players have an "ugly" card in their hand?

This situation came up last night at my regular game. After a brief discussion it was decided that becuase the "ugly" card casuses players to fold, the result was that everyone folded. So the deck was re-shuffled and the game was replayed with ALL players.(includin players whome had safely folded previous to the ugly card).

Is this the corect proceedure?(if there is such a thing)

Other options lazily considered were:
- All the remaining players split the pot
- Reshuffle and play a new game but with only the remaininig players

I would like to hear what other peolpe think.