Exit in Non-Listed Firms: When and How to Use Share Transfer Restrictions?

Abstract

Share transfer restrictions are typical elements of governance in non-listed firms where members, given the locked nature of investments, are in strong dependence upon each others actions and contract for special share transfer clauses to ensure successful cooperation. First purchase rights, such as a right of first refusal and a right of first offer, and tag-along rights stipulate efficient investments by discouraging value-decreasing transfers of shares to third parties and reducing incentives for opportunistic renegotiation. Similar problems arising during the ordinary course of business are solved by different forms of put and call options, including their special buy/sell-out modifications—Russian roulette clauses. The study of the best practices of contracting for share transfer restrictions in closely-held firms can help improving the practices of business organization.

Keywords: Corporations, partnerships, limited liability companies, closely-held business entities, corporate governance, joint-ventures, shareholders agreements, principal-agent, moral hazard, hold-up problems

JEL Classification: K22, D82, D86, G32, G34