Agreement to retain shares: Overview, definition, and example
What is an agreement to retain shares?
An agreement to retain shares is a contractual arrangement in which a shareholder agrees to keep their shares in a company for a certain period of time and not sell or transfer them. This type of agreement is often used in business transactions, such as mergers, acquisitions, or funding rounds, where the company wants to ensure that certain shareholders maintain their ownership stake for a specified duration. The agreement might also outline specific conditions under which shares can be sold or transferred, such as approval from other shareholders or the company’s board.
In simpler terms, an agreement to retain shares is when a shareholder promises not to sell or transfer their shares for a certain time, often to maintain stability or trust in the company.
Why is an agreement to retain shares important?
An agreement to retain shares is important because it helps maintain control and stability within the company during periods of transition, such as after a merger or acquisition. By ensuring that key shareholders hold onto their shares, the company can prevent sudden changes in ownership that might disrupt operations, business strategies, or investor confidence. This type of agreement can also help foster trust among new investors, as it shows that existing shareholders are committed to the company’s future success.
For SMB owners, having an agreement to retain shares in place can be a way to secure the interests of the company and ensure that the leadership or ownership remains aligned for a certain period.
Understanding an agreement to retain shares through an example
Imagine your company is going through a fundraising round, and you, as the owner, are negotiating with investors. As part of the deal, you agree to an agreement to retain your shares for the next three years, meaning you will not sell or transfer your shares during that period. This commitment helps assure investors that you, as the founder, remain dedicated to the company's long-term growth and success, and it prevents any instability that might arise from significant changes in ownership.
In this case, the agreement to retain shares aligns your interests with those of the investors, promoting confidence in your company’s future.
Example of an agreement to retain shares clause
Here’s an example of what an agreement to retain shares clause might look like in an investment agreement:
“The Shareholder agrees to retain their shares in the Company for a period of three (3) years from the date of this Agreement. During this period, the Shareholder shall not sell, transfer, or otherwise dispose of their shares without the prior written consent of the Board of Directors, except in the event of a liquidation or other event as defined herein.”
Conclusion
An agreement to retain shares is a useful tool to ensure stability and maintain control during business transactions or periods of change. For SMB owners, implementing this type of agreement can help secure the confidence of investors, prevent unwanted changes in ownership, and ensure that key shareholders remain committed to the company’s long-term success. By clearly defining retention periods and conditions, businesses can foster stronger relationships with investors and reduce the risk of ownership disruptions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.