What is a drag along clause?
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.
Can you have both drag along and tag along?
Drag-along rights and Tag-along rights are clauses commonly included into shareholder agreements. These are often recommended to be inserted, alongside reserve matters, rights of first refusal, rights of first offer, put and get options, non-dilution clauses.
How do you enforce drag along rights?
The first remedy that majority owners can take is to request minority owners to grant an irrevocable proxy. If given, this allows majority owners to act on behalf of minority owners in any vote or action required to effect the sale. It includes signing documents on behalf of the minority owners.
What is tag along shareholders agreement?
A Standard Clause in many shareholder agreements including unanimous shareholder agreements (USAs), a tag-along (or co-sale) provision, gives minority shareholders the right to participate on a pro rata basis in any controlling shareholder’s sale of its interests in the corporation to a third party.
How does drag along work?
A drag-along right is a provision or clause in an agreement that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.
Where are drag along provisions found?
Rights contained in a company’s articles of association for a majority of the shareholders (usually more than 75% in nominal value) to accept an offer to buy their shares and to force the holders of the remaining 25% to accept such an offer.
Are drag-along rights enforceable?
Drag-along rights are enforceable if the drag-along provision is drafted properly and contained within a valid and enforceable contract, and if the transaction is executed according to the terms of the provision.
Who benefits from drag-along rights?
Benefits of Drag-Along Rights for Minority Shareholders This provides advance notice of the corporate action mandated for the minority shareholder. It also provides communication on the price, terms, and conditions that will apply to the shares held by the minority shareholders.
Are drag-along rights standard?
However, the owner must usually offer the same terms and conditions to the minority shareholders as to the majority shareholder(s). Drag-along rights are fairly standard terms in a stock purchase agreement.
What is the difference between tag along and drag-along?
Tag-along or co-sale rights are essentially the opposite of drag-along rights. Whereas tag-along rights give minority shareholders negotiating rights in the event of a sale, drag-along rights force the minority shareholders to accept whatever deal is negotiated by majority shareholders.
How does drag-along work?
What is the purpose of drag along right?
A drag along provision allows the majority shareholder(s) to require the minority shareholder(s) to sell their shares. The aim of drag along rights is to provide liquidity, flexibility and an easy exit route for a majority shareholder.
Are drag along rights enforceable?
What is the difference between tag along and drag-along rights?
Are drag-along rights common?
In most cases, the controlling majority, or a minimum of 51 percent are allowed to hold a vote to trigger a drag-along the sale. However, 66 percent may be the ideal rate depending on the company. Voters are usually preferred stockholders. Common stockholders might also be included, but this is rarer.
