Some Key Clauses in Shareholder Agreements

Published: March 5, 2018 at 12:25 by Renate Harrison

Here are a few key practical considerations about shareholders’ agreements for founders to keep in mind.

Management & Operations. Parties to the agreement should have their roles and obligations well defined. This should include the composition of the board of directors, as well as the relationship between minority and majority shareholders.

Appointment of Board of Directors. Specify the number of directors and the right of shareholders to designate board nominees.

Vesting Periods. The agreement should specify what happens to the shares if a principal shareholder must leave.

Rights of First Refusal. A ROFR requires a shareholder who receives an offer from a third-party purchaser to give notice of the offer to the other shareholders. The other shareholders then have the right to match the third-party offer within a certain time. If none do, the shareholder who received the third-party offer may sell his/her shares to the third party.

Tag-Along Rights. This allows other shareholders to “tag-along” (that is, sell his/her shares) with a shareholder who is selling to a third party.

Drag-Along Rights. If a third party offers to buy the controlling shareholder’s shares, the drag-along provision allows the controlling shareholder to force all other shareholders to either sell their shares or approve the resulting change of corporate control.

Shotgun clause. A shotgun clause is intended to break a deadlock between shareholders. A shotgun clause normally provides that one shareholder gives notice to the other of exercising the shotgun clause and offering a price for the shares. This starts the clock and forces the receiving shareholder to either buy the instigator’s share at the stated price or sell his shares to the instigator at the stated price.