Drag-along Rights
/dræɡ əˈlɒŋ raɪts/
Drag-along rights allow majority shareholders to force minority shareholders to sell their shares when the majority decides to sell the company.
Drag-along rights allow majority shareholders to force minority shareholders to sell their shares when the majority decides to sell the company.
When majority shareholders (typically investors holding more than 50% of shares) receive an offer to sell the company, they can "drag along" all minority shareholders to participate in the sale.
This ensures the buyer can acquire 100% of the company rather than just a controlling stake, which most buyers prefer.
Investors want drag-along rights because they make the company more attractive to potential buyers and ensure a clean exit.
Without these rights, minority shareholders could block or complicate a sale, potentially reducing the company's value or making it unsellable.
Minority shareholders must sell their shares on the same terms and conditions as the majority shareholders.
They receive the same price per share and cannot refuse the sale, but they're protected by receiving fair market value for their equity.
Drag-along rights typically activate when majority shareholders receive a bona fide offer from a third party to purchase the company.
The offer usually must meet certain minimum thresholds, such as valuing the company above a specified amount or offering cash consideration.
Most drag-along provisions include safeguards ensuring minority shareholders receive the same deal terms as majority shareholders.
The sale must typically be to an unrelated third party at fair market value, and minority shareholders often have the right to review sale documentation.
Drag-along rights force minority shareholders to sell, whilst tag-along rights allow minority shareholders to join a sale initiated by majority shareholders.
Think of drag-along as mandatory participation and tag-along as optional participation in exit events.
