If you are a business owner, it is important to understand what drag-along and tag-along rights are in shareholders agreements. Drag-along rights allow the majority shareholder to force the minority shareholders to sell their shares to a third party if the majority shareholder decides to sell their shares. Tag-along rights protect minority shareholders by requiring the majority shareholder to include them in any sale of shares. In this blog post, we will provide an overview of drag-along and tag-along rights and offer some tips for negotiating these provisions in your shareholders agreement.
What is a Drag-Along Right?
A drag-along right is a provision in a shareholders agreement that allows the majority shareholder to force the minority shareholders to sell their shares to a third party if the majority shareholder decides to sell their shares. The purpose of this provision is to allow the majority shareholder to sell their shares without having to negotiate with each individual minority shareholder.
Drag-along rights are typically triggered when the majority shareholder receives an offer from a third party to purchase their shares. The majority shareholder must then give notice of the offer to the minority shareholders and give them an opportunity to sell their shares at the same price and on the same terms as the offers made to the majority shareholder. If the minority shareholders do not agree to sell their shares, then the majority shareholder can still sell their shares, but they will have to buy out the minority shareholders at fair market value.
What is a Tag-Along Right?
A tag-along right is a provision in a shareholders agreement that requires the majority shareholder to include the minority shareholders in any sale of shares. The purpose of this provision is to protect minority shareholders by ensuring that they have an opportunity to sell their shares if the majority shareholder decides to sell their stake in the company.
Tag-along rights are typically triggered when the majority shareholder receives an offer from a third party to purchase their shares. The majority shareholder must then give notice of the offer not only to the minority shareholders, but also give them an opportunity to sell their shares at the same price and on same terms as those offered by the third party. If one or more of the minority shareholders elects to exercise their tag-along right, then all of them must be included in the sale.
Find out more about drag along and tag along rights.
Drag-along and tag-along rights are important provisions in a shareholders agreement that can have a significant impact on your business. As a business owner, it is important that you understand these provisions and how they work so that you can negotiate for terms that are favourable for you and your business.