As your company grows, there comes a time when you need to consider how to protect the shareholders involved. One of the ways this can be done is through a robust Shareholders’ Agreement. This is one of the most fundamental legal documents a company can have and specifies the relationship between the shareholders and the rights and duties they have in terms of the company.
Below we briefly discuss the value of adding tag-along and drag-along clauses for the purpose of protecting certain shareholders.
What are minority and majority shareholders?
A majority shareholder is a person, or company, who owns more than 50% of the shares of the company and a minority shareholder is a shareholder who owns less than 50% of the company. The addition of “tag-along” and “drag-along” provisions protects minority shareholders and majority shareholders respectively.
What are tag-along rights?
Simply put, tag-along rights protect minority shareholders in the case where the majority shareholder decides to sell their total number of shares in the company. This clause allows the minority shareholder to “tag-along” and be included in the sale on equal terms and price.
By doing this, minority shareholders capitalise on the sale of a company that a majority shareholder has organised.
What are drag-along rights?
Unlike tag-along rights, drag-along rights protect the majority shareholder. In this case, the majority shareholder has the right to force a minority shareholder into the sale of a company without asking permission, albeit still on equal terms and price. In this way, the majority shareholder “drags” the minority shareholder into the sale of the company.
Drag-along rights are primarily used when a buyer wants to acquire 100% of the company and when the majority shareholder wants to have complete control over the minority shareholders in in the event of sale.
The contents of a Shareholders Agreement must be given significant thought. These provisions can significantly impact the shareholders. The decision to include “tag -along” or “drag-along” rights in the shareholders’ agreement can have a huge impact on the sale of your company.
Please contact us if you need legal advice on these provisions, we would be happy to help.