Shareholders’ Agreements – Frequently Asked Questions


Top frequently asked questions about Shareholders’ Agreements

Set out below are a number of frequently asked questions in relation to shareholders’ agreements.

What are drag along provisions?

Drag along provisions allow the majority shareholder(s) of a company to force the remaining shareholder(s) to accept an offer from a third party to purchase the whole company, where the majority shareholder(s) have/has accepted that offer. The other minority shareholders are then “dragged along” and forced to sell their shares at the same time and at the same price for each share.

The aim is to provide an exit route to the majority shareholder(s) for its investment as most buyers will want to acquire 100% of the company and not be left with a (potentially uncooperative, or even hostile) minority shareholder group. It is sometimes known as a “squeeze out” provision.

What are tag along provisions?

Tag along provisions are corresponding rights entitling certain minority shareholders to participate in a sale by the other majority shareholders at the same time and at the same price for each share. The minority shareholder then “tags along” with the majority shareholder(s)’ sale.

These provisions are typically included in the constitution of the company and state that, if the tag along procedures are not followed by the purchaser, its attempt to buy any of the shares is invalid and must not be registered.

What are pre-emption rights and do I need them?

Pre-emption is a right of first refusal in favour of existing shareholders in relation to the allotment of new shares or the transfer of shares from one shareholder to another (whether that person/company is an existing shareholder or to be a new shareholder). A pre-emption right is an anti-dilution mechanism that allows shareholders to preserve their percentage shareholding in a company, provided they have sufficient funds available to acquire such shares when they are offered.

What is a good leaver?

A good leaver is a shareholder employee who leaves the Company (and subsequently ceases to be a party to the shareholders’ agreement) due to retirement, agreement with the company, or reasons outside of his/her control, for example death or disability.
In a situation where a shareholder is classed as a “good leaver”, it is likely that the shareholders’ agreement will entitle the shareholder up to full market rate for their shares.

What is a bad leaver?

A bad leaver is a shareholder employee who leaves the company due to an event or circumstance justifying their summary dismissal. Such events and circumstance could also include being declared bankrupt, being convicted of a criminal offence or committing a material breach of the shareholders’ agreement or articles of association.

In a situation where a shareholder is classed as a “bad leaver”, it is not uncommon for the shareholders’ agreement to stipulate that the shareholder only receives a percentage of the market value of their shares, or even just their nominal value.

Do I need to amend my Articles of Association?

The articles of association of a company should complement and, where necessary, mirror the shareholders’ agreement. You need to ensure that both documents can be read in conjunction with each other and that they do not conflict.

It is highly unlikely that your existing articles of association will be a perfect fit with your new shareholders’ agreement. We will, therefore, draft a set of articles of association to ensure that you have clear, concise and consistent company documentation.

The articles of association are a public document and so not all the relevant provisions and agreements between the shareholders are suitable for the articles. Such provisions can be placed in the shareholders’ agreement which is a private document and known only by the parties to it.

How We Can Help

A member of our specialist team will be happy to help.

To discuss Shareholders’ Agreements – Frequently Asked Questions issues, please either use the contact form on the right, email us at or call us today on +44(0)161 941 4000 to speak to a member of our team.

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