Shareholders’ rights of first refusal
Hello and welcome to TransLegal's Lesson of the Week.
Today I'm going to be talking about shareholders' rights of first refusal.
Previously we talked about pre-emption rights, that is, rights for shareholders to be offered new shares issued in the company in order to protect shareholders against unwanted new shareholders and to prevent dilution of their percentage ownership in the company.
So what about the situation where a shareholder wants to sell or transfer those shares? Well, usually there's no restriction on shareholders transferring their shares. The general rule is that they can transfer their shares to whomever they want. However, existing shareholders may want the power to decide who becomes a shareholder. So it's common for a provision to be included in the articles of association or the bylaws of a company stating that shareholders who want to sell or transfer shares must first offer the shares to the other shareholders. This provision is also often included in a separate agreement which the shareholders entered into together known as the Shareholders Agreement.
So the effect of this provision is that any shareholder who wants to sell its shares to an outsider must first offer their shares to existing shareholders at a fair value. This gives the shareholders more control over who can own shares in the company and is an important safeguard for shareholders even though it does place a restriction on the transferability of shares.
Thank you for listening.