3. Sale of Shares
Without any agreement otherwise, a shareholder can sell their shares to anyone. For example, in the event of a dispute they could sell them to a competitor. Or personal financial difficulties may force the sale of the shares to the highest bidder. This may not be in the best interests of the company. A shareholder agreement may contain ‘pre-emption’ provisions allowing a right of first refusal which means that existing shareholders have the right to purchase shares in advance of anyone else. This could be to a set formula or by matching the price of an outside bidder.
Often with new companies it is desirable that no shares are sold to outsiders within the first say 2 years of business life, to provide a period of stability while the company is establishing itself. Again, this restriction can easily be incorporated in a Shareholder Agreement.
In practice these sort of provisions in a Shareholder Agreement give confidence to all concerned and makes for good profitable decisions within the business.
It may be that a significant majority of the shareholders will wish to sell their shares to a third party, however the third party may wish to ensure that it is the whole company which is purchased – not wishing to inherit a ‘rump’ of possibly troublesome existing shareholders. The shareholder Agreement can oblige all minority shareholders in such a situation to offer their shares too, thus facilitating the sale of the entire company.
Usually seen together with the ‘tag along’ provisions, this would protect minority shareholders in the event of a change of control of the company where there are no drag along provisions invoked. It forces the purchaser of the majority of the company’s shares to also purchase the minority shareholder’s shares.
Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.