A boutique law firm of exceptional quality and talent where clients' and lawyers' interests are aligned by collaboration and innovation
A good shareholders’ agreement is not just about what happens when things go wrong. It should also help shareholders deal sensibly with success - including a potential sale of the company.
Two key provisions often considered in this context are drag-along and tag-along rights. The terminology may sound a little unfamiliar, but the underlying principles are relatively straightforward.
A drag-along right allows a specified majority of shareholders to require minority shareholders to sell their shares if a qualifying offer is accepted. Buyers will often want to acquire 100% of the shares, rather than take on a business with a minority interest remaining.
Without a drag-along provision, a minority shareholder may be able to delay or prevent a transaction that the majority wishes to proceed with, potentially making the business less attractive to a buyer.
Tag-along rights approach the issue from the perspective of the minority shareholder. They give minority shareholders the right to participate in a sale if the majority sells its shares. This can prevent a minority shareholder from being left in the company with a new controlling shareholder they did not choose, and potentially a very different direction for the business.
There are, however, important details to consider. What percentage of shareholders should be able to trigger the drag? Does it apply only to a third-party sale? How should warranties, deferred consideration or earn-outs be dealt with? These are issues that are better addressed and agreed before an exit opportunity arises, rather than in the pressure of a live transaction.
Well-drafted drag-along and tag-along provisions can help preserve both fairness and saleability. They are not about favouring majority or minority shareholders; they are about agreeing the guardrails in advance, so that when an exit opportunity appears, everyone knows where they stand.
