Tag-along Rights
/tæɡ əˈlɒŋ raɪts/
Tag-along rights give minority shareholders the legal right to join in when majority shareholders sell their shares to a third party, allowing them to sell their shares on the same terms and conditions.
Tag-along rights give minority shareholders the legal right to join in when majority shareholders sell their shares to a third party, allowing them to sell their shares on the same terms and conditions.
Tag-along rights activate automatically when a majority shareholder receives an offer to sell their shares.
The minority shareholders must be notified and given the opportunity to include their shares in the same transaction at the same price per share.
This process typically requires 10-30 days' notice depending on the shareholders' agreement.
Investors seek tag-along rights to protect themselves from being left behind with an unknown new majority owner.
Without these rights, they could find themselves as minority shareholders in a company controlled by someone they don't know or trust.
It's essentially an exit insurance policy.
When majority shareholders receive a purchase offer, they must notify all shareholders with tag-along rights.
These minority shareholders can then choose to sell their proportionate share alongside the majority sale.
If they don't participate, the original sale can proceed as planned.
Tag-along rights cannot prevent a sale from happening.
They simply provide minority shareholders with the option to participate in the transaction.
If minority shareholders choose not to exercise their tag-along rights, the majority shareholder's sale proceeds normally.
Tag-along rights protect minority shareholders by giving them the option to join a sale, whilst drag-along rights protect majority shareholders by forcing minority shareholders to participate in a sale.
They're opposite sides of the same coin, both designed to facilitate clean exits.
Tag-along rights typically don't apply to transfers between family members, transfers to trusts, or small transfers below certain percentage thresholds.
They also usually exclude transfers to company employees through share option schemes.
The specific exclusions are always detailed in the shareholders' agreement.
Tag-along rights can complicate your exit strategy by potentially reducing the number of shares you can sell in any given transaction.
However, they're generally considered reasonable investor protections and are standard in most investment agreements.
Understanding these rights helps you plan more effectively for future funding rounds and
