Drag along and tag along rights are important provisions typically included in a company’s shareholder or investment agreement but which can also be included in a company’s articles of association. When read together they balance the competing interests of typically those holding a minority of the shares in a company with those holding a majority of the shares. B P Collins’ corporate and commercial team explores the rights in more detail.
Drag along rights
Drag along rights typically allow majority shareholders to force minority shareholders to sell their shares to a buyer when the majority shareholder has decided that they wish to sell. This enables the majority shareholder to deliver 100% of the shares in the target company (which a buyer will normally require).
The minority shareholder will receive largely similar financial terms as the majority shareholder, although certain commercial terms may differ and care must be taken if the consideration is not being paid fully in cash.
Tag along rights
Tag along rights protect minority shareholders. They give minority shareholders the ability to ensure that if a majority shareholder wishes to sell their majority stake they will also be able to sell for the same price. This ensures that the minority shareholder is not left behind without any prospect of realising value for their shares.
If you would like advice on drag along or tag along rights in your shareholder or investment agreement, please get in touch with our corporate and commercial team by email or by phone on 01753 889995.
Where should these rights be set out?
These rights are commonly included in shareholder or investor agreement, but companies can also include them in their articles of association.
This matters because articles form part of the company’s constitutional documents under the Companies Act 2006, meaning they are binding on all shareholders, including those who were not a party to the original shareholders’ / investment agreement. This gives greater enforceability and provides assurance that all shareholders are bound by the drag or tag mechanisms.
Considerations when drafting
The key points to consider when drafting and negotiating drag along and tag along clauses include:
- What percentage of the issued shares must be held by those triggering drag along rights?
- What stake needs to be sold to allow the tag rights to be triggered?
- How the rights interact with pre-emption rights or restrictions on transfer?
- How do the drag and tag rights interact? Does the time line and process set out in the relevant agreement actually work?
- What happens if the consideration for the sale of shares is not being paid in cash?
- Can someone who is being dragged challenge the value?
- Will the party who is dragged or who is tagging along be required to give warranties (other than as to title or warranty) and if they do not, what could the consequences be on any sale?
- What process must be followed to exercise the rights?
If you are reviewing or negotiating shareholder arrangements and would like advice on drag along or tag along rights, our corporate and commercial team at B P Collins is here to help. Please email enquiries@bpcollins.co.uk or call 01753 889995 to get in touch. Our experienced lawyers can guide you through the drafting of these provisions with clarity and confidence.
