What is a drag along clause in a shareholders agreement?

A Standard Clause in many shareholder agreements including unanimous shareholder agreements (USAs), a drag-along provision gives majority shareholders wishing to sell all or a substantial portion of their shares in the corporation to an unrelated third party the right to force the remaining shareholders to also sell …

What are drag along and tag along provisions?

The drag along clause requires the minor shareholder to sell their shares. The tag along clause requires the minor shareholder to be allowed to join in on a sale. Both clauses are designed to give the minor shareholder the rights to receive the same price, terms and conditions as any other seller.

What is a tag along shareholder?

Tag-along rights also referred to as “co-sale rights,” are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company.

What are drag along and tag-along rights in a start up who benefits from these and why?

Key takeaways. Drag-along rights and tag-along rights are important forms of investment realisation in a shareholders agreement. Drag-along rights favour the majority shareholder while tag-along rights are more beneficial to the minority shareholder.

Which is better drag-along or tag along?

Whereas a ‘tag along’ clause provides protection to small investors, a ‘drag along’ provision protects the interests of the major shareholder(s). A ‘drag along’ clause allows a large shareholder (or group of shareholders) to ‘drag’ the other shareholders into a joint sale of the entire venture.

Are tag along rights common?

Tag-along rights are a common contract provision, but they’re generally not offered automatically to minority shareholders.

Why is drag along important?

The drag-along provision itself is important to the sale of many companies because buyers are often looking for complete control of a company. Drag-along rights help to eliminate the current minority owners and sell 100\% of a company’s securities to a potential buyer.

How does drag along work?

A drag along right allows a majority of shareholders to force minority shareholders to join the majority in a sale of the whole of the company to an unrelated third party. The expression “drag along” comes from the idea that the minority shareholders are being forced against their will to sell their shares.

What is the purpose of a drag along provision?

A drag along clause will allow the majority shareholder to ‘drag’ the remaining minority shareholders with them and require them to sell their shares to the potential buyer at the same price, in order to allow the buyer to purchase the entire company.

Where are drag along rights?

Drag-along rights can be instituted through capital fundraising or during merger and acquisition negotiations. If, for example, a technology startup opens a Series A investment round, it does so to sell ownership of the company to a venture capital firm in return for capital infusion.

Which is better drag along or tag along?

What are tag and drag rights?

A drag-along provision enables a majority shareholder to force a minority shareholder to join in the sale of a company. Tag-along rights allow shareholders to “tag-along” with the majority sale and sell their stock when another shareholder receives a sale offer.

What are “drag along and tag along” provisions in a shareholders agreement?

The “drag along” and “tag along” provisions are a classic example of a balancing act between the rights of a majority shareholder and a minority shareholder. This article will explain what a shareholders’ agreement is and what drag along and tag along provisions are. What is a Shareholders’ Agreement?

What is the difference between tag along and drag along?

Drag along Whereas a ‘tag along’ clause provides protection to small investors, a ‘drag along’ provision protects the interests of the major shareholder (s). A ‘drag along’ clause allows a large shareholder (or group of shareholders) to ‘drag’ the other shareholders into a joint sale of the entire venture.

What does tag along mean in company law?

Tag along. A tag along provision 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.

What is a drag along clause in a share sale?

A drag along clause will allow the majority shareholder to ‘drag’ the remaining minority shareholders with them and require them to sell their shares to the potential buyer at the same price, in order to allow the buyer to purchase the entire company.