The drag along clause requires the minor to sell their shares, while the tag along clause requires the majority shareholder to allow the minor to join in on a sale. Both clauses give to the minor the rights to receive the same price, terms and conditions as any other seller.

What do drag along rights mean?

Drag-along rights, or drag rights, which give the majority owner of a company the right to force minority owners to participate in a sale of the company, can be a fiercely negotiated provision in a company’s governing documents.

What does tag-along?

/tæɡ/ -gg- informal. to go somewhere with a person or group, usually when they have not asked you to go with them: I don’t know her, she just tagged along with us.

What is the purpose of drag along rights?

A drag along provision allows the majority shareholder (s) to require the minority shareholder (s) to sell their shares. The aim of drag along rights is to provide liquidity, flexibility and an easy exit route for a majority shareholder.

How are drag along rights beneficial to minority shareholders?

In this case, a majority shareholder’s drag-along right supersedes the governing agreements and allows him to force a sale of the company. It is also pertinent to note that while drag-along rights are meant to protect the majority shareholder of a company, they are also beneficial for minority shareholders.

How are drag along rights used in mergers and acquisitions?

Drag along rights are triggered in all types of sales transactions such as mergers and acquisitions, or a change of control in the company. Drag along rights benefit the majority shareholders cum promoters. An incoming investor might wish to acquire full control over the company.

Why are drag and tag along provisions important?

Other than above, the “drag along” and “tag along” provisions are a classic example of a balancing act between the rights of a majority shareholder and a minority shareholder. It is submitted that these rights are considered to be an important part of any term sheet/shareholders’ agreement that involves the transfer of equity shares.