Drag Along Rights In Shareholders Agreement

Drag-along rights are mainly used when a buyer wants to acquire 100% of the company and if the majority shareholder wants to have full control of minority shareholders in the event of a sale. A drag-along right is a provision or clause in an agreement that allows a majority shareholder to compel a minority shareholder to sell a business. The majority owner who goes through saturation must give the minority shareholder the same price, conditions and conditions as any other seller. Drag along rights can be introduced through equity raising or during merger and acquisition negotiations. For example, when a technology start-up opens a Series A investment cycle, ownership of the company is sold to a venture capital firm for capital injection. In this concrete example, the majority stake belongs to the Chief Executive Officer (CEO) of the company, who owns 51% of the company`s shares. The CEO wants to retain control of the majority and protect himself even in the event of a possible sale. To do so, it negotiates a drag-along right with the offer of shares in a venture capital firm and gives it the right to compel the venture capital firm to sell its shares in the company if a buyer ever shows up. The basic idea is to ensure that existing shareholders are not forced to welcome a new unwanted shareholder. This means that if the majority shareholder or shareholders find a buyer of the entire company, smaller shareholders may be forced to join the sale, even if they prefer it.

These two clauses give the minor the right to obtain the same price, the same conditions as any other seller. Drag-along rights usually end with an IPO. [2] There are specific provisions that you can find or make clauses on the date: a shareholders` pact normally prohibits a shareholder from selling his shares without giving other shareholders the reasonable opportunity to buy them. These provisions are called “pre-emption rights.” In the event of the sale of a majority stake by the shareholder (s) who owns a certain majority of the shares, a drag-along right allows the majority seller shareholder to obtain an exit by forcing the remaining minority shareholders to sell their shares on the same terms to a third-party buyer in good faith.