A stitch in time saves nine: four legal instruments to enforce a shareholders' agreement
Every shareholders’ agreement (SHA) concluded in the context of a venture or M&A deal contains rules for the joint operation of the business and protective tools for the parties (e.g., investor and startup). Mechanisms like drag-along, tag-along, ROFR, pre-emption and others have become part of the standard toolkit for any SHA.
However, the utility of any contractual clause lies not only in its wording, but in its enforceability. A well-drafted clause alone does not guarantee its execution in practice. Parties must strategically consider how to secure performance in scenarios where a counterparty refuses to sign necessary documents, avoids mandatory corporate filings, or ceases communication altogether.
This article outlines key legal tools that help ensure the enforceability of obligations under a SHA – so that these mechanisms function in real life, not just on paper.
1. Irrevocable Power of Attorney
An irrevocable power of attorney is a power of attorney that cannot be unilaterally revoked by the principal before its expiration - except under specific statutory exceptions under law or as otherwise stipulated in the PoA itself.
Why must it be irrevocable? Under the laws of most jurisdictions, a standard PoA can be revoked at any time by the principal.
As an enforcement tool, an irrevocable PoA enables one shareholder to empower another shareholder (or, for instance, a company secretary or director) to act on their behalf in executing transaction-related documents—particularly in the case of non-cooperation.
This mechanism is especially effective in enforcing drag-along rights—a clause that allows majority shareholders (a group of shareholders holding a defined percentage of shares) to force minority shareholders to sell their shares on the same terms, in the event of a third-party acquisition offer.
Example: A majority investor agrees to sell the company and exercises their drag-along right by notifying the minority founder-shareholders. The minority is contractually obliged to sell but may delay or ignore requests to sign the share purchase agreement (SPA) or required filings. If the majority holds a previously granted irrevocable PoA, they may sign all necessary documents on the minority's behalf, allowing the transaction to close regardless of minority resistance.
Important: the PoA will only be effective if jurisdiction-specific requirements are met. It must clearly state what actions are permitted, and in some places, be notarized or executed as a deed. It must specify irrevocability, tie the PoA to SHA obligations, and remain valid until the SHA ends or obligations are fulfilled
2. Pledge of shares
A pledge of shares is a form of security under which one party grants another the right to take control of their shares upon a default under the SHA or related transaction documents, i.e. if the other breaches the deal.
The pledge is formalized through a separate share pledge agreement, usually accompanied by:
- a signed stock transfer form;
- share certificates or ownership proof (if applicable);
- board/shareholder resolutions (if required);
- company notification about the encumbrance.
Important: under English law, a pledge may also be structured as a charge. The main difference lies in possession: with a pledge, share documents are physically transferred; with a charge, they stay with the pledgor. Some jurisdictions (for example, UK) also require registration of the pledge in state authorities.
A pledge can be effective for enforcing rights like ROFR (right of first refusal).
Example: A founder must offer shares to the investor per SHA before selling to a third party but tries to circumvent this rule. If a pledge is in place, such a breach may be a default event.
The investor may then:
- initiate transfer to themselves;
- block registration with the third party (due to the pledge is recorded);
- maintain corporate control.
The pledge generally restricts the pledgor’s ability to dispose of the shares without the pledgee’s consent, thus serving as a powerful enforcement mechanism.
3. Call and Put Options
An option is an agreement between the parties of the transaction that grants one of the parties (the option holder) the right to either buy (call option) or sell (put option) a share of the company at a pre-determined price within a specified period, subject to the occurrence of certain conditions.
Options can also operate as enforcement tools. Let’s consider the example of a tag-along right – an instrument that protects the interests of a minority shareholder in the event that the majority shareholder sells their shares to a third party. The essence of the tag-along right is that if the majority shareholder decides to sell their shares, the minority shareholder has the right to join the transaction and sell their shares under the same terms.
Suppose the majority shareholder intends to sell their stake to a third party (an external buyer). The minority shareholder notifies the majority shareholder of their intention to exercise the right to join the transaction, but the majority shareholder excludes the minority from the deal. In this case, the minority shareholder exercises a put option (i.e., an option for sale) and demands that the majority shareholder buy their shares at the agreed price. These consequences force the majority shareholder either to include the minority shareholder in the transaction (fulfilling the tag-along terms) or to buy the shares directly from them, which reduces the majority shareholder's benefit.
Often, a put option will also include a penalty mechanism – a buyout at a premium price: if the majority shareholder breaches the tag-along right and does not include the minority shareholder in the transaction, the minority shareholder may force them to buy the shares at higher price – for example, not for $100 per share, but for $120 per share.
4. Delegation of Corporate Authority
Another practical enforcement strategy is pre-appointment of a neutral corporate actor (e.g. director or secretary) empowered to act in the interests of all parties, including in cases where a shareholder obstructs.
Transaction documents may include provisions that:
- authorize a designated director or secretary to execute all documents related to drag/tag/ROFR mechanisms,
- establish that such actions are sufficient and binding even without signatures from all parties,
- allow the board to delegate authority to one director without needing full board approval,
- enable such officer to sign SPAs, instruments of transfer, and make registry filings on behalf of the non-cooperative party.
All such provisions must be consistent with the company’s corporate documents and duly implemented (e.g., via a board resolution confirming the authority of the appointee to act in enforcement scenarios).
This method may be combined with the irrevocable power of attorney for added reliability.
Thus, it is important to understand that a clause in a SHA by itself is just a foundation, which may remain unenforceable without a properly embedded enforcement mechanism. Therefore, a good SHA should consist of a combination of mechanisms that, when triggered, allow you to actually exercise your rights in practice—even if the other party attempts to evade them.
