Drag along and tag along rights

Fri 29 December 2023

What are tag along and drag along rights?

Tag along and drag along rights are crucial clauses frequently found in shareholder agreements, particularly for privately-held companies. Tag along rights benefit minority shareholders whereas drag along rights are valuable for majority shareholders.

Tag along rights allow minority shareholders to sell their shares on the same terms as controlling shareholders when they exit the company.

Drag along rights are a way for majority shareholders to force all other shareholders to sell their shares alongside them at a predetermined price and terms. The rights enable a smooth exit and the ability to find a single buyer for the entire business, making it more attractive to potential acquirers.

Important Considerations

As with all legal matters and issues, the details are important. There are many variables with drag or tag clauses, which will often centre around :-

Valuation - fair and independent valuation is crucial for ensuring both fairness and feasibility of drag along mechanisms, often involving independent valuation or using a pre-agreed formula or setting a minimum price per share that must be offered in a drag along scenario.
Triggering Events - specifying the events that activate these rights, such as a third-party offer for all or a controlling percentage of shares, minimum percentage of shares being sold by a controlling shareholder, whether a change in the company's ownership structure triggers these rights.
Pro Rata Participation - whether minority shareholders must sell all of their shares or can participate on a pro rata basis in a Drag-Along sale.
Piggyback Rights - allowing minority shareholders to participate in a sale initiated by other minority shareholders, even if the controlling shareholder is not selling.
Good Faith Negotiations - requiring the controlling shareholder to negotiate in good faith with potential buyers to maximize value for all shareholders in a drag along scenario.
Notice Periods - the amount of time shareholders have to exercise their tag along rights or respond to a drag along notice.
Exclusions - outlining any specific shareholders or circumstances where these rights might not apply.
Dispute Resolution - determining how any disputes regarding the exercise of these rights will be resolved, often through arbitration or mediation.

Variables are highly negotiable and should be tailored to the specific needs of the company and its shareholders to ensure a fair and equitable exit strategy for all parties involved.