Question 1

What is a shareholder agreement?

Accepted Answer

A shareholder agreement is a contract between the shareholders of a corporation that governs their relationship with each other and with the company. It covers topics like voting rights, transfer restrictions (ROFR, drag-along, tag-along), deadlock resolution, board composition, dividend policy, and exit mechanisms. It supplements the certificate of incorporation and bylaws.

Question 2

What is the difference between drag-along and tag-along rights?

Accepted Answer

Drag-along rights allow majority shareholders to force minority shareholders to join a sale of the company on the same terms. This prevents a minority from blocking a deal. Tag-along (co-sale) rights protect minority shareholders by giving them the right to join any sale by a majority shareholder on the same terms, preventing the majority from selling their shares to a third party while leaving the minority behind.

Question 3

What is a Right of First Refusal (ROFR)?

Accepted Answer

A Right of First Refusal gives existing shareholders (and sometimes the company) the right to purchase shares before they can be sold to an outside third party. When a shareholder wants to sell, they must first offer the shares to the company and/or other shareholders at the same price and terms offered by the third party. This prevents unwanted third parties from becoming shareholders.

Question 4

What is a shotgun buyout (Texas Shootout)?

Accepted Answer

A shotgun buyout (also called a Texas Shootout or Russian Roulette clause) is a deadlock resolution mechanism where one shareholder names a price and the other must either buy at that price or sell at that price. This forces fairness because the initiating shareholder has an incentive to name a fair price — if they price too low, they risk having to sell their shares cheaply.

Question 5

Do I need protective provisions for minority shareholders?

Accepted Answer

Yes, protective provisions are important for minority shareholders. Without them, a majority shareholder could make unilateral decisions that harm minority interests, such as diluting their ownership, selling company assets, or entering self-dealing transactions. Protective provisions require supermajority approval for major decisions like issuing new stock, selling the company, or changing the business.

Question 6

What happens if a shareholder dies or gets divorced?

Accepted Answer

A well-drafted shareholder agreement includes involuntary transfer provisions covering death, disability, divorce, and bankruptcy. Typically, the company and remaining shareholders get a right to purchase the deceased or departing shareholder's shares at fair market value, preventing shares from passing to heirs, ex-spouses, or creditors who may not be suitable business partners.

Shareholder Agreement Generator

Shareholder Agreement Generator