Tag Along & Drag Along

Tag along and drag along clauses

What are Tag Along and Drag Along Clauses?

Shareholders’ agreements include clauses that guarantee certain conditions in view of the possible transfer of shares or holdings. These are contractual obligations that are also normally included in the articles of association. These provisions prevent possible future conflicts between shareholders or third parties interested in acquiring a company.

These clauses regulate the relationship between majorities and minorities in the event that they sell holdings or company shares. Therefore, they are mechanisms that protect the rights and interests of the company’s shareholders.

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Right to Accompany or Tag Along

The objective of the right to accompany or “tag along” is to favor the liquidity of the minority partners. If this clause is not agreed, the majority shareholder may sell its controlling interest to a third party. The minority partners would therefore remain with a strange shareholder without having the option to sell their shares.

This right allows shareholders to accompany the majority sale. Selling their shares when another shareholder receives an offer. This clause is not intended as an obligation. It is a right that provides the option to accompany and voluntarily adhere to the sale. Minority shareholders may sell their shares on the same terms and conditions as the majority shareholder.

Typically, buyers seek to have complete control of a company. The majority shareholders cannot sell unless the buyer acquires the shares of the shareholders who exercise this right. This often means acquiring the entire company.

This right produces a balance between all partners. Their position in the sale is aligned regardless of their percentage in the share capital. Thus, minority partners can obtain favourable sales terms that would otherwise not be available.

Right of drag or “drag along”

The purpose of the right of dragging is to favour the possibilities of any shareholder to sell its participation in the company. Unlike the tag long, the right of dragging is imposed as an obligation. All shareholders are obliged to accept a purchase offer for the entire capital of the company. As long as the price and conditions are beneficial.

This clause benefits the majority shareholder, since it forces the minority shareholders to join in the sale of the company. The conditions applicable to the transfer will be identical for all shareholders.

From the position of the senior partner, the main advantage of the right of drawdown is the following. The buyer is given a company without minority interests. Sometimes buyers are not willing to participate in a structure with multiple minority shareholders with different interests.

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