Shareholders’ Agreement – Transfer of shares
In previous blog posts, we discussed the benefits of having a shareholders’ agreement, and specific matters shareholders’ agreements can address. One of the most common issues addressed by shareholders’ agreement is the transfer of shares by the shareholders.
Generally, most private corporations require the board of directors to approve any transfer of shares. Assuming that approval is obtained, shareholders are generally free to deal with their shares as they see fit. So, while you may have been content to enter into business with your friend Joe, Joe could sell his shares to his buddy Lisa, and unless you control the board, there is little you can do to stop it.
This is where a shareholders’ agreement can provide you some insurance that you are not stuck with a shareholder you do not want in the company. The shareholders’ agreement can prevent or restrict Joe from transferring his shares to others without getting approval from the other shareholders, or without complying with the terms of the shareholders’ agreement.
In most cases, a shareholders’ agreement would allow Joe to transfer his shares to certain named persons, such as a holding company wholly owned by Joe, or a family trust in which Joe is the sole trustee. These permitted transferees are commonly referred to as “permitted entities”. The shareholders can decide for themselves which transfers should always be allowed, and which transfers need sign-off.
Outside of transferring to a permitted entity, Joe would have to comply with the other provisions of the shareholders’ agreement relating to a transfer of shares before he could transfer his shares to Lisa. Typically, these provisions would include a right of first refusal (ROFR), tag along and drag along. Each of these provisions will be dealt with in separate blog posts.
Thinking of putting a shareholders’ agreement in place for your company? Contact us.