Drag along and tag along rights

What are tag along and drag along rights?

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.

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.

How can we help?

As with all things legal the devil is in the detail. There is a lot of scope for negotiating the scope and detail of drag and tag rights. This usually occurs at the time a shareholder agreement is negotiated or changes to the company's articles of association.

Clients we advise on drag and tag rights include majority shareholders, minority shareholders, equity investors and employees offered shares in an employee share scheme.

Our experience will help you get the right clauses in place and ensure you fully understand the nuances.

Negotiating points

There are many variables with drag or tag clauses, which will often centre around :-

• Minority Shareholder Protections - ensuring that minority shareholders have adequate protections, such as the right to information and consultation.

• 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 maximise 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 it's shareholders to ensure a fair and equitable exit strategy for all parties involved.

To discuss your business and your position as shareholder, please do call or email.