How to protect your interest with a Shareholder Agreement

A well-drafted shareholders’ agreement ensures the interests of both majority and minority shareholders are protected. The agreement should stipulate the rights and obligations of all parties and should include five important clauses.

Refusal and shotgun clauses in shareholder agreement

A shareholder agreement should include both hard right and soft right refusal clauses. A hard right of first refusal clause requires that shareholders who want to divest of their interest solicit bids from third parties, which they must present to the remaining shareholders, who then have the right to purchase the shares at the bid price. A soft right of first refusal requires a shareholder who wants to sell to first render a price and terms of sale to the other shareholders. If they refuse the offer, the shareholder can sell to a third party under the conditions that were previously stipulated. A shotgun clause enables a shareholder to offer his shares to another stakeholder. If they are unable to accept the offer, they must sell their shares to the tendering shareholder.

Drag and tag along provisions in shareholder agreement

A drag along provision forces minority shareholders to sell their stake if an offer for all company shares is made and accepted by the majority shareholders. A tag along provision protects minority shareholders by obliging buyers to buy all shares of a company at the same price being offered for the majority stake.

When drafting a shareholder’s agreement, it is important to know how the interest of each stakeholder will be protected in the event of a bid or sale. By including the above clauses, shareholders won’t be caught off guard when an offer is made on their stake in a company.