Drag along and tag along rights

What are tag along and drag along rights?

Drag along rights protect majority shareholders by allowing them to force minority shareholders to join in a sale of the company. When a majority shareholder finds a buyer who wants to purchase the entire company, drag along rights prevent minority shareholders from blocking the sale. The minority must sell their shares on the same terms as the majority, ensuring a clean exit opportunity can be delivered to a potential purchaser.

Tag along rights protect minority shareholders by giving them the right to join in a sale if majority shareholders are selling their shares. If the majority find a buyer for their shares, the minority can 'tag along' and sell their shares on the same terms. This prevents the majority from selling their controlling stake while leaving minority shareholders stuck with a new, unknown controlling shareholder.

Negotiating points for drag or tag clauses

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. Minority shareholders often seek minimum price conditions and requirements for identical terms.

• 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 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, and whether a change in the company's ownership structure triggers drag or tag 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 drag or tag rights might not apply.

• Dispute resolution - determining how any disputes regarding the exercise of these rights will be resolved, often through arbitration or mediation.

How can we help?

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.