There are many different aspects of a Shareholders’ Agreement. This is to explain what Tag Along and Drag Along rights are.
What are tag along and drag along rights?
A tag along provision also called ‘co-sale right’ is a clause that allows minor shareholders to ‘tag along’ with a larger shareholder or group of shareholders if they find a buyer of their shares.
A drag along provision is a clause that allows majority shareholders to force the minority shareholders to join in on a sale of their shares.
What are your rights?
The drag along clause requires the minor to sell their shares, while the tag along clause requires the majority shareholder to allow the minor to join in on a sale.
Both clauses give to the minor the rights to receive the same price, terms and conditions as any other seller.
If the procedure is not followed by the buyer, their attempt to buy any of the shares is invalid and will not be registered.
How are tag and drag along rights triggered?
To rely on both clauses:
- The buyer must acquire no less than 50.1% of the issued share capital of the company
- The sell must be agreed upon by the majority of the shareholders or the board of directors.
What are examples of tag along/drag along clauses?
There are specific provisions you can find in the tag or drag along clauses:
- The amount to be acquired by the buyer might be more than 50.1%.
- A limited time period for the minority shareholder to match the offer and buy the majority shareholder’s shares itself might be specified – pre-emption rights.
- The offer may have to match a minimum agreed price.
Where are these clauses present?
Both clauses can be find in Articles of Association or a Shareholder Agreement. However, if Articles of Association are changed to insert a drag along clause this has to be made in good faith.
Why do you need these clauses?
The tag along clause:
- Protects minority in case the majority do not exercise their drag along rights.
If you are part of the minority you do not want be left behind in the event a major shareholder decides to exit.
- Provides liquidity and exit route for minor shareholder
If a minor shareholder held 10% of the shares, he might have to sell its shares at a price lower than the actual value because of the lack of liquidity.
The drag along clause:
- Is designed to protect the majority shareholders. Buyers are often looking for complete control of a company for the operation go smoothly.
- Drag along rights help to eliminate minority owners and sell 100% of a company shares to a potential buyer.
- If some minor activist shareholders retain a minority share it can make buyers life difficult!
These clauses balance each other out, if you decide to have, incorporate the other, as well.
If you’re unsure about the legal support that you or your business require, book a call with our legal team. We’ll talk you through your needs and answer the questions you may have.