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  • There is no legal constraint limiting the topics in a shareholder's agreement.
  • There are many important issues that should be addressed such as voting agreements and share transfer regulations.

Although there is no legal constraint limiting the topics in a shareholder agreement, many California shareholder agreements address the following seven clauses:

1. Registration Rights

Many California corporations have shareholder agreements stipulating the conditions in which the corporation must file a registration statement under the U.S. Securities Act for the benefit of the shareholders (or their constituencies). The registration statement governs the shareholders ability to hold a public sale of their shares; however, this section is not commonly included in family-owned corporations without investors.

The registration rights section of a shareholder agreement typically includes clauses addressing the registration process, how the shares offered for sale will be distributed among shareholders participating in the sale, how much power an underwriter has to reduce the number of shares belonging to those shareholders and the conditions that would trigger any indemnification for securities law liability.

Registration rights can be written as a "piggy-back" or "demand" registration right. A demand registration right allows shareholders to force the corporation to file a registration statement for their benefit. A piggy-back registration right allows the shareholders to register the sale of their own shares along with those the corporation offers when the corporation files a registration statement for its own purposes. Piggy-back rights are intended to come into effect when a shareholder wants to sell shares to a third party. The other shareholders can use the piggy-back right to block the sale until the third party also offers them the same price and conditions for their shares. This works mainly to safeguard minority shareholder interests.

2. Co-Sale/Tag-Along Rights

Co-sale/tag-along clauses allow shareholders to sell their shares along with a sale by another shareholder. A shareholder with a tag-along right is entitled to buy another shareholder's shares on the same terms and conditions as all other shareholders. This often has the practical implication of making shares harder to sell to a third party. As a result it can be used to protect minority shareholders from not being considered in a deal or to help keep the business within the family by making a deal very difficult to close without near unanimous approval.

3. Rights of First Offer and First Refusal

Rights of first offer stops a shareholder from selling shares to a third party unless the shareholder first solicited offers from the other shareholders. The right of first refusal generally stipulates that the selling shareholder must inform the other shareholders of the terms of the proposed sale to the third party sale, wait for them turn down the right to purchase the shares in question, and only then can the selling shareholder sell to the third party.

4. Voting Agreements

California allows shareholders to contract on how they will vote their shares. Cal. Corp. Code § 706(a). Furthermore California also requires voting agreements to be clearly visible on their certificates or on transaction statements relating to the shares if certification is not available. Cal. Corp. Code § 418. As a result, share certificate legends indicating the existence of a shareholders' agreement usually also clearly states whether there are any voting agreements. California shareholder agreements usually have clauses where the shareholders all agree to a certain board composition and contract that they will vote for that board composition.

Another type of voting agreement found in California shareholder agreements stipulates that when a certain number of shareholders vote for a merger or a sale of corporate assets, the remaining shareholders will vote for the merger or sale. This agreement is usually coupled with another agreement where shareholders agree to sell their shares if a certain number of shareholders have agreed to sell (known as a drag-along clause).

5. Share Transfer Regulations

Shareholders usually will agree not to transfer their shares unless they go through filing a registration statement under federal and state securities laws or unless it is a transaction in which registration requirements do not apply.

6. Protective Provisions

These provisions are written to safeguard the interests of certain shareholders from dilution of ownership interest of the benefits of their rights and preferences. Protective provisions usually address the issuing of other classes of shares with greater rights or preferences. They likewise frequently provide these original shareholders with approval rights over corporate actions that usually only require board approval (for example taking debt above a certain amount, contracting with consideration above a certain amount, or selling corporation assets above a certain amount). Finally, protective provisions frequently give important shareholders pre-emptive rights to buy future issuances of securities.

7. Buy-Sell Clauses

These clauses stipulate the conditions in which the shareholders can force the corporation to buy back their shares or the conditions in which they can permit the corporation to buy back their shares. These conditions usually are situations such as when a shareholder dies or is incapacitated and when a shareholder who is also an employee is fired or let go.

If you or your company are looking to draft or revise a California shareholder agreement, please contact us toll-free at (888) 827-8880 or email us at

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