Tag-Along vs. Drag-Along Rights

Majority and minority shareholders are often in a perpetual state of tension. Minority shareholders in a company will often seek to find ways to secure some semblance of power and control, while majority shareholders are often eager to assert theirs. This dynamic can be a particular problem when the company is for sale, which is why there are a popular set of rights often used by companies that issue stock called tag-along and drag-along rights. 

What are Tag-Along Rights?

These rights are included in the shareholder agreement or articles of association for the benefit of minority shareholders. Also called “co-sale rights,” these rights allow minor shareholders to participate in a sale of the company and receive the same price, terms, and conditions enjoyed by the majority shareholders. In other words, the minority shareholders get to “tag along” with the majority owners. 

What are Drag-Along Rights?

Drag-along rights are the flipside to tag-along rights. When an individual or other business comes along to buy a company, the majority shareholders are permitted to “drag along” the minority shareholders and force them to participate in the company’s sale. Without drag-along rights, buyers might balk at purchasing some companies due to their inability to buy 100 percent of the shares. Both of these provisions are intended to provide a somewhat-level playing field for all owners of a company’s stock. 

When Are These Rights Exercised?

Every shareholder agreement is unique, but generally, drag-along and tag-along rights are initiated whenever a buyer wishes to purchase more than 50 percent of a company’s existing shares. 

Pre-Emption Rights for Minority Shareholders

Sometimes used in tandem with drag-along and tag-along rights, pre-emption rights can allow minority shareholders to purchase the shares of the majority owners before an outside seller has access. In other contexts, pre-emption rights for shareholders simply refers to the availability of common stock to those already owning some share of the company (subscription rights). 

Conclusion

Tag-along and drag-along rights are important pieces to have in place for your shareholders when issuing stock, given how this could affect the future sale of your company. Reach out to the team at Integrated General Counsel if you have questions about shareholder rights or whenever you need help preparing contracts or agreements for your company. You can call us at 925-399-1529 or reach us through our website to schedule a consultation.