How Do I Get Out? 5 Ways to Exit a Shareholders’ Agreement
A well‑drafted shareholders agreement plays a vital role in how a company operates, setting the ground rules for decision‑making, ownership and control. But circumstances change, relationships evolve, and sometimes staying in the business is no longer the right move.
If you need a way out, here are five common exit mechanisms commonly found in shareholders agreements, explained simply and with minimal legal jargon.
Disclaimer: This blog is for informational and educational purposes only. It does not constitute legal advice, nor financial advice. You should seek personalised legal advice before making any decisions about your commercial arrangements.
Firstly: What exactly is an exit mechanism?
An 'exit mechanism' is a clause in a shareholders agreement that sets out the rules for how a shareholder can leave the company, or in some cases, how they can be made to leave. Without them, there is no agreed process for what happens when a shareholder wants out, falls out with others, or simply wants to move on.
The absence of exit mechanisms causes the exit process to get expensive and ugly. When there's no agreed process, every decision becomes a fight over what the shares are worth, who gets to buy them, whether a third party can come in, and what happens if nobody can agree. Those fights don't resolve themselves. They escalate. And by the time a lawyer is involved, the cost of sorting it out almost always dwarfs what a well-drafted shareholders agreement would have cost to begin with. The truth is that exit mechanisms are cheapest to agree on when everyone is getting along which is exactly when nobody thinks they need them.
Band analogy:
Think of it like forming a band with a friend. Before you record a single note, you sit down and agree on the rules: what happens if one of you wants to leave, what happens if you stop getting along, what happens if a record label comes knocking with an offer you can't refuse. You write it all down before any of that happens, because trying to agree on the rules after the relationship has broken down is a very different conversation.
So with that in mind, here are five of the most common exit mechanisms you'll find in a shareholders agreement, including what they do, how they work, and what they actually look like in practice:
1) Tag Along Rights: If the majority is selling, I can't be left behind
Are you a minority shareholder in a company? Is the majority shareholder selling their share to a third party? Tag along rights allow you to 'tag along' in the sale by forcing the proposed buyer to include you in the purchase.
Example clause:
Proposed Sale by Majority Shareholder
If a Majority Shareholder proposes to sell any of their Shares to a third party (the Proposed Buyer), they must not complete that sale unless they first ensure that the Proposed Buyer offers to purchase all Shares held by each Minority Shareholder on the same terms and conditions (including price per Share) as offered to the Majority Shareholder.
Tag along rights allow you to exit the company during a major ownership change, ensuring you’re not left behind with a new controlling shareholder you didn’t choose. They give minority shareholders the ability to sell on the same terms as the majority, protecting you from being stuck in a weakened position after the deal.
Band analogy:
Think of it like being the drummer in a band. The lead singer owns the majority of the band's name and brand, and a record label comes along wanting to sign them. Tag along rights mean the label has to sign you too, on the same terms. You don't get left behind playing local pubs while the rest of the band goes on tour without you.
2) Drag Along Rights: If the majority wants to sell, the minority can't prevent it
Majority shareholder? Want to sell the whole company? Minority shareholders may prevent the sale by refusing to sell. That’s where drag along rights come in, which 'drag along' the minority shareholders to force a 100% sale.
Example clause:
Right to Require Sale
If Shareholders holding more than 50% of the Shares (the Dragging Shareholders) agree to sell all of their Shares to a third party (the Proposed Buyer), they may require all other Shareholders (the Dragged Shareholders) to sell all (but not less than all) of their Shares to the Proposed Buyer on the same terms and conditions.
Drag along rights allow you to exit the company without being blocked by minority shareholders. This gives the majority deal certainty, prevents hold‑outs, and allows the company to be sold as a whole rather than being stalled by a small group of shareholders.
Band analogy:
Think of it like a band where the majority of members have agreed to sell their name and catalogue to a record label and call it a day. The bassist wants to keep playing and refuses to sign. Drag along rights mean their reluctance doesn't kill the deal. If enough of the band has agreed to sell, the holdout has to sign too. The whole catalogue goes, not just most of it.
3) Buy-Sell (Shotgun) Clause: One of us has to go, at a fair price
A shotgun clause allows you, as a shareholder, to offer to buy out another shareholder's shares at a nominated price. The receiving shareholder must then choose to either: (i) sell their shares at that price, or (ii) buy your shares at the same price. This mechanism forces a clean separation between shareholders and ensures a fair price is offered, as the initiating party must be willing to buy or sell at that value.
Example clause:
Triggering a Buy‑Sell Notice
Any Shareholder (the Initiating Shareholder) may at any time give a written notice to another Shareholder (the Recipient Shareholder) offering to purchase all of the Recipient Shareholder’s Shares at a specified price per Share (the Buy‑Sell Notice).
Recipient’s Election
Within 30 days after receiving the Buy‑Sell Notice, the Recipient Shareholder must elect, by written notice to the Initiating Shareholder, to either:
(a) sell all of their Shares to the Initiating Shareholder at the price stated in the Buy‑Sell Notice; or
(b) buy all of the Initiating Shareholder’s Shares at the same price per Share.
A shotgun clause allows you to either exit the company or force another shareholder's exit of the company. This reciprocity keeps the process fair while providing a clean, fast mechanism to separate shareholders when the business relationship can’t continue.
Band analogy:
Think of it like two songwriters who co-own a catalogue of songs and can't work together anymore. One of them names a price for the whole catalogue and puts it to the other. The other then has to decide: buy my share at that price, or sell your share to me at the same price. Because the one naming the price knows they could end up on either side of the deal, they're going to name a fair one. Nobody lowballs when they might be the one paying.
4) Right of First Offer: I want to sell, but I first have to offer to existing shareholders
Want to sell your shares and exit the company? A right of first offer clause forces you to first offer those shares to existing shareholders. You propose the price, the others then have a set time to negotiate and decide whether to buy. If no agreement is reached, you are free to approach third-party buyers on the same terms as those offered.
Example clause:
Notice of Intention to Sell
If a Shareholder (the Selling Shareholder) wishes to sell all or any of their Shares, they must first give written notice to the other Shareholders (the ROFO Notice) stating:
the number of Shares they wish to sell;
the proposed price per Share; and
the key terms on which they are willing to sell.
For 20 Business Days after receiving the ROFO Notice, the other Shareholders have the exclusive right to negotiate with the Selling Shareholder to purchase all (but not less than all) of the Shares on the terms set out in the ROFO Notice or on such other terms as they may agree.
Failure to Reach Agreement
If no agreement is reached within the 20‑day period, the Selling Shareholder may offer the Shares to a third party, provided that the terms offered to the third party are no more favourable than those set out in the ROFO Notice.
This allows you to exit the company while protecting existing shareholders. You retain the freedom to sell if no internal deal is reached, while the other shareholders are shielded from unexpected new owners entering the business on more favourable terms.
Band analogy:
Think of it like a band member who wants to sell their share of the group's catalogue but isn't sure what it's worth on the open market. Before they can approach any record labels or outside buyers, they have to offer their share to the other band members first at their asking price. If nobody in the band wants it at that price, they're free to take it to market. But the people who wrote the songs alongside them get first listen before anyone else does.
5) Right of First Refusal: I have an offer to buy my shares, but I first have to offer to existing shareholders
Have an offer from a third party to buy your shares? The right of first refusal forces you to offer the sale to existing shareholders on the same terms as the third-party offer. The existing shareholders have a set time to consider the sale. If they do not exercise this right within the set time period, you are free to sell to the third party.
Note: Unlike the right of first offer, which kicks in before you find a buyer, the right of first refusal kicks in after.
Example clause:
Receipt of Third Party Offer
If a Shareholder (the Selling Shareholder) receives a bona fide written offer from a third party (the Third Party Offer) to purchase all or any of their Shares, the Selling Shareholder must not accept that offer unless they first comply with the procedure set out in this clause.
Notice to Existing Shareholders
Within 5 Business Days of receiving the Third Party Offer, the Selling Shareholder must give written notice to the other Shareholders and the Company (the ROFR Notice) setting out:
(a) the number of Shares the subject of the Third Party Offer;
(b) the identity of the proposed buyer, to the extent permitted by any confidentiality obligations;
(c) the price per Share offered; and
(d) all other material terms and conditions of the Third Party Offer.
Exercise Period
For 20 Business Days after the date of the ROFR Notice (the Exercise Period), the other Shareholders have the right to elect to purchase all (but not less than all) of the Shares specified in the ROFR Notice at the same price per Share and on the same terms and conditions as the Third Party Offer, by giving written notice to the Selling Shareholder (the Exercise Notice).
Failure to Exercise
If no Shareholder gives a valid Exercise Notice within the Exercise Period, the Selling Shareholder may proceed to sell the Shares to the third party, provided that:
(a) the sale is completed within 60 days after the expiry of the Exercise Period;
(b) the price per Share is no less than the price specified in the ROFR Notice; and
(c) the terms of the sale are no more favourable to the third party than those set out in the ROFR Notice.
The right of first refusal keeps ownership with the people who built the business. If someone else wants in, existing shareholders get first say. It doesn’t exist to block a sale. Rather, it's about making sure that if the business changes hands, the people with the most to lose get the first chance to do something about it.
Band analogy:
Think of it like a band member who gets an approach from a record label wanting to buy their share of the catalogue. Before they can shake hands on it, they have to go back to the rest of the band and give them the chance to match the offer. It feels like an unnecessary step when the deal is already sitting there. But if the band passes, they walk away with exactly the same deal they started with, and nobody can say they weren't given the chance to keep it in the family.
To conclude:
Every one of these clauses needs to be tailored to your specific situation: the size of the company, the number of shareholders, and what you're actually trying to protect. A shareholders agreement that doesn't account for how you get out is only half a job.
If you want to make sure yours is doing the full job, that's exactly what we're here for. Need a shareholders agreement tailored to suit your commercial aspirations? We can help you.
Author: Paddy Horoch