A Shareholders’ Agreement is a legal contract entered into by the shareholders of a company, which sets out, amongst other things, how shares can be issued, sold and transferred. It is quite common for shares to be transferred from one shareholder to another person or entity, and it is important for the Shareholders’ Agreement to clearly set out the procedure for such transfers. A business solicitor specialising in company law should draft this clause to ensure it is legally airtight.

To avoid shareholders selling their shares to a person or entity that may have no interest in the company, the Shareholders’ Agreement should outline the following:

  • How can a shareholder sell or transfer shares? A common approach is that a shareholder who wishes to sell his or her shares must first give notice in writing to the other shareholders. The selling shareholder should also give the other shareholders an option to purchase the shares on a prorate basis, in proportion to their existing shareholding.
  • What method is used to value the shares? It is important to set out a clear formula for the pricing of the shares. Will the shares be sold at market value? If so, how is the market value of the company determined? These are commercial decisions to be made by the company.
  • What happens when there is an offer to buy a majority of the shares? Some Shareholders’ Agreements include what we call a “drag-along” provision. This provision allows a majority shareholder who wishes to sell his or her shares, to drag other shareholders along, and force the other shareholders to sell their portions of shares to the same purchaser for the same price.
  • What will you do if there is a takeover offer? The Shareholders’ Agreement can provide for when a purchaser makes an offer to a majority shareholder to purchase its shares, and the majority shareholder agrees, if the minority shareholders wish, they can “tag-along” with the majority shareholder, and the purchaser is required to purchase all the shares of the minority shareholders who are “tagging-along” for the same price.

In addition to setting rules for the transfer of shares, the Shareholders’ Agreement can also prescribe certain restrictions on their shareholders. These may include not allowing shareholders to encumber, charge, mortgage or otherwise borrow money against their shares without the prior written consent of all the other shareholders, and only allowing a shareholder to transfer its shares in certain circumstances. Such circumstances may include, for example, transfer to:

  • A buyer which is controlled by the same person that controls the shareholder;
  • A trust of which the trustee is the same person that controls the shareholder or is an entity which is controlled by that person;
  • A wholly-owned subsidiary of the shareholder or a wholly-owned subsidiary of the ultimate holding company of the shareholder; or
  • A spouse, de facto partner, sibling or child.


A detailed procedure relating to the transfer of shares is extremely important in a Shareholders’ Agreement. A shareholder selling shares in the company can have significant commercial consequences for the company, and having a clear process which sets out how a shareholder can transfer his or her shares can help the remaining shareholders retain some control of where, and to whom, the shares are being sold or transferred. On top of this, the Agreement can help protect the company from falling into the hands of a person or entity whose interests are not aligned with those of the remaining shareholders.

For further guidance on how to draft a Shareholders’ Agreement, contact LegalVision to speak with one of our experienced business solicitors.

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