What are Drag-Along and Tag-Along Rights?

Explanation of drag-along and tag-along rights

Drag-along and tag-along rights are mechanisms used to manage shareholder interests during the sale of a company or a controlling shareholding. They are typically included in shareholder agreements or investment agreements in privately owned companies.

Drag-along rights allow majority shareholders to require minority shareholders to sell their shares if a buyer agrees to acquire the company. This helps ensure that a sale can proceed without minority shareholders preventing the transaction.

Tag-along rights provide protection for minority shareholders. If a majority shareholder sells their shares to a third party, minority shareholders may have the right to join the transaction and sell their shares on the same terms.

These provisions are commonly used in companies with multiple shareholders, such as start-ups, private equity-backed businesses, and growing SMEs. In the UK, the terms of these rights are usually defined within shareholder agreements and operate alongside company law provisions under the Companies Act.

Key characteristics of drag-along and tag-along rights

Key characteristics of drag-along and tag-along rights include:

• They are contractual rights typically included in shareholder agreements.
• Drag-along rights allow majority shareholders to require minority shareholders to sell shares during a sale of the company.
• Tag-along rights allow minority shareholders to participate when majority shareholders sell their shares.
• The rights are designed to balance the interests of majority and minority shareholders.
• They commonly apply when a controlling interest in the company is being transferred.
• The specific terms and thresholds are defined within the shareholder agreement.

How drag-along and tag-along rights work

These rights generally operate through the following structure:

• Shareholders agree the drag-along and tag-along provisions when the shareholder agreement is established.
• A potential sale of shares or the company is proposed to a third-party buyer.
• The relevant right is triggered depending on the transaction structure.
• Shareholders participate in the sale in accordance with the agreed contractual provisions.

Common misconceptions about drag-along and tag-along rights

• Drag-along rights do not allow majority shareholders to change the sale price unilaterally; the terms are defined within the shareholder agreement.
• Tag-along rights do not prevent a sale from taking place; they provide minority shareholders with participation rights in certain transactions.
• These rights are not limited to large corporate transactions and are commonly used in SME shareholder agreements.

Questions about Drag-Along and Tag-Along Rights 

What are drag-along rights?

Drag-along rights allow majority shareholders to require minority shareholders to sell their shares when the company is being sold to a third party.

What are tag-along rights?

Tag-along rights allow minority shareholders to sell their shares alongside majority shareholders if a controlling stake in the company is sold.

Why are drag-along and tag-along rights included in shareholder agreements?

These provisions help manage shareholder interests during ownership changes by enabling company sales while providing protections for minority shareholders.

When are drag-along rights triggered?

Drag-along rights are typically triggered when a majority shareholder agrees to sell a controlling stake or the entire company to a third-party buyer.

Do drag-along and tag-along rights apply automatically?

These rights apply only when they are included in a shareholder agreement or investment agreement and are triggered according to the terms set out in that contract.