Drag Along Agreements

The objective of the rights is to provide a majority shareholder with liquidity, flexibility and a simple way out. Given that many buyers of a target company want 100% control of the transaction and rarely agree to allow a minority shareholder to retain a minority stake, it would be difficult for a majority shareholder to accept an offer if minority shareholders do not cooperate and block the sale of a business. Even if they have majority control, minority shareholders can still, rightly, delay or thwart plans to change the company`s management. Therefore, most commercial buyers want complete control – ownership of all equity. For a large institutional investor, it is essential that, if he is to be able to sell to a commercial buyer, there is a delay that forces the minority to sell simultaneously to the buyer. Tag along rights differ from drag-along rights, although they have the same underlying view. It is also possible to find tag along rights in share offers as well as in merger and acquisition contracts. Tag-along rights offer minority shareholders the opportunity to sell, but do not impose any obligation. If there are tag along rights, this may have a different impact on the terms of a merger or acquisition than would be discussed with drag along rights. As a general rule, the parties who provide the participation are the ones who benefit from it. The way in which they are identified and how the threshold for cooperation with other parties is required may vary from agreement to agreement.

As a general rule, when a majority of common shareholders vote in favour of the sale, the owners of all other class of shares (as well as minority shareholders) must also sell. The majority could be defined as 51%, 75% or another amount. While the drag-along rights themselves can be clearly detailed in an agreement, the distinction between the majority and the minority can be something to watch out for. Companies may have different types of stock categories. A company`s statutes refer to the ownership and voting rights of shareholders, which can affect the majority or minority. With respect to share transfers, a Tag Along right will often offer greater protection to minority shareholders over a right of pre-emption, particularly in situations where the minority may not have the financial means to acquire a majority stake.