9 Important Questions About Unanimous Shareholder Agreements

5. How can the USA restrict Share Transfers?

A key feature of many USAs is preventing shares from being transferred to unknown or undesirable parties. This objective must however, be reconciled with the desire of shareholders to maintain liquidity of their shares. The following procedures are common when selling shares of a company governed by a USA:

• Right of First Offer: A shareholder proposing to sell their shares must first make an offer to sell their shares to the existing shareholders. The offer must be made on the same terms that they are willing to accept from a third party. If the other shareholders do not accept the offer, the selling shareholder is free to sell their shares to a third party.

• Right of First Refusal: When a shareholder proposing to sell their shares first obtains a bona fide offer from an arm’s length third party that they are prepared to accept, the other shareholders will then have a right to acquire the shares at the same price and on the same terms set out in the third party offer, failing which the selling shareholder may then sell to the third party.

• Piggyback (Tag-Along) Rights: This right requires a purchaser of a shareholder’s shares to also purchase the other shareholder’s shares on the same terms. Piggyback rights are often demanded by minority shareholders.

• Drag-Along Rights: This right is the reverse of piggyback rights. Typically, a controlling shareholder(s) requires that minority shareholders sell their shares to a third party to whom the controlling shareholder(s) is selling his/her shares.

Even if compelled to sell, the transfer of shares should be smooth. A USA should provide detailed transaction mechanics, including time periods for all notices and actions to be taken, as well as details regarding closing dates and procedures.

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