Rights of First Refusal, Piggy-Back Rights, and other Restrictions on Transfer of Shares

Most shareholder agreements for closely-held corporations will restrict the sale or transfer of shares. The purpose of these restrictions are to ensure that you don’t unwillingly end up in business with someone you don’t know and/or with whom you would not have gone into business in the first place. For example, if you’re in business with someone and that business partner wants to sell his or her shares to an outside party you could end up in business with a third party stranger.

Shareholder agreements have a few different mechanisms to avoid those situations. The most common is a right of first refusal, which gives current shareholders first dibs on the shares that are to be sold (i.e., you get chance to buy those shares at the offered price before they can be sold to the outside party). Another common mechanism is a pre-emptive right, which gives the existing shareholders first dibs on any new shares to be issued by the corporation.

A tag-along right or piggyback right can be included to allow a minority shareholder to get out if there is a sale to a third party. If the majority shareholder is selling their shares, the minority shareholder with a piggy-back right can require the buyer to also buy the minority shareholder’s shares at the same price and on the same terms and conditions.