Why transfer restrictions matter
Unlike public markets, private equity relies on a closed shareholder group. Investors back a specific management team and strategy, and unexpected changes in ownership can undermine both.
Transfer provisions are therefore designed to:
- Preserve investor control over who joins the cap table
- Prevent fragmentation of ownership
- Ensure alignment between shareholders
- Avoid disruption at key moments (including exit)
In short, they protect the integrity of the investment.
General prohibition
Most shareholder arrangements start from a simple premise: no transfers without consent.
Typical provisions include:
- A general prohibition on transfers unless approved by the board or investor majority or in accordance with agreed pre-emption rights
- Narrowly defined “permitted transfers” (e.g. to family trusts, intra-group entities, or connected persons)
- A requirement for incoming shareholders to adhere to the shareholder agreement
For management shareholders, restrictions are often tighter. Their equity is linked to their ongoing role in the business, so transfers are generally limited outside defined leaver scenarios.
Pre-Emption rights
Pre-emption rights are central to transfer regimes in UK private equity deals. They ensure that existing shareholders have the opportunity to acquire shares before they are offered to third parties.
There are two main ways existing shareholders exercise control over who joins the company as an owner: the right of first refusal (ROFR) and the right of first offer (ROFO).
- ROFR – where a shareholder receives an offer for shares, the shares must first be offered to existing shareholders. Only if they refuse can they be sold to an external party.
- ROFO – where the shareholder has not necessarily received an offer but wants to sell, the seller must offer the shares to existing shareholders first.
ROFR is more common in private equity, as it gives greater certainty and control over pricing and outcomes.
Permitted transfers
‘Permitted transfers’ carve-outs usually exist in private companies to allow some flexibility in transferring shares. The most common examples of permitted transfers are transfers within a family or a family trust, transfers to vehicles owned by the same shareholder, and transfers between companies in the same corporate group.
Pricing mechanisms
Justifying the price at which shares can be sold can vary in approach. The most common ways are:
- shares sold at a fair market value decided by an independent valuer;
- shares sold at a price agreed between the parties acting in good faith; and
- shares sold at a valuation based on a predefined formula (i.e. earning multiples).
In some scenarios, private companies can apply differing pricing rules dependent on whether the shareholder is a ‘good leaver’ or ‘bad leaver’. Further detail relating to leaver provisions can be found in our previous article.
Interaction with other shareholder rights
Transfer provisions do not operate in isolation. They sit alongside:
- Compulsory transfer provisions (e.g. on a management departure)
- Drag-along rights, enabling a full exit
- Tag-along rights, protecting minority shareholders
Together, these provisions form a cohesive framework governing both day-to-day stability and exit execution.
Stability through order
Shares in PE-backed private companies cannot be sold freely but reduced opportunities for liquidity are often the trade‑off for greater stability in the shareholder base. Placing limitations on who can buy or sell shares typically safeguards against future ‘rogue’ shareholders who do not share similar objectives for long-term continuity.
Transfer restrictions are designed to manage shareholder exits, not to stop exits entirely. Permitted transfer carve-outs, pre-emption rights, and defined pricing mechanisms, all act as powerful levers for shareholders to maintain control and stability in a more predictable way.
With specialist expertise in all types of private equity transactions, clients can rely on DWF for carefully drafted provisions to help align the interests of founders, management, and investors, supporting long‑term growth and governance.
Authored by Will Munday, Matthew Judge and Derek Obaseki.
