What is the difference between drag-along and tag-along rights in a shareholders agreement?

Clients tend no to raise this with me, but I always advise them on both drag-along and tag-along rights because the end goal, and the reality, is that business owners are going to want to sell eventually.

The first point I should make is that drag-along and tag-along are contractual provisions often included in a company’s shareholder agreements. They help manage share sales, particularly in companies with multiple shareholders.

Here's my explanation of each:

Drag-Along Rights

Definition:

Drag-along rights allow majority shareholders to "drag" minority shareholders into a sale of the company or their shares, ensuring that a buyer can acquire 100% of the company if they wish.

The purpose is to facilitate the smooth sale of a company by avoiding situations where minority shareholders block the transaction.

From experience I find that buyers will prefer to acquire the full control, so drag-along rights make the company more attractive to potential acquirers.

Key Features:

• The right is typically triggered when a majority of shareholders agree to sell their shares (e.g. 75% of voting shareholders).
• The minority shareholders are compelled (forced) to sell their shares on the same terms and conditions as the majority shareholders.

For example: if a company’s majority shareholders negotiate a sale at £10 per share, drag-along rights ensure the minority shareholders must also sell their shares at £10, even if they were reluctant to sell.

Tag-Along Rights

Definition:

Tag-along rights in contrast, give minority shareholders the right to "tag along" and sell their shares on the same terms as majority shareholders when the majority sell theirs.

The purpose is to protect minority shareholders from being left behind with an unaligned new majority owner. Tag-along rights ensure minority shareholders benefit equally from any sale of the company.

Key Features:

• The right will typically apply when a majority shareholder is selling a significant portion of their shares (e.g. over 50%).
• The minority shareholders can opt to sell their shares to the buyer at the same price and terms as the majority.

For example: if the majority shareholder sells their shares to a buyer for £10 each, minority shareholders can "tag along" and sell their shares to the buyer for £10 as well, ensuring they are not disadvantaged.

Why Are They Important?

Drag-along rights are essential for majority shareholders and buyers who want full control without complications from dissenting minority shareholders.

Tag-along rights aim to protect minority shareholders, ensuring fair treatment in significant share sales and maintaining their financial interests.

Both rights balance the interests of majority and minority shareholders, making them a critical component of well-structured Articles of Association or shareholder agreements.

Got questions about your own start-up or need tailored advice? Feel free to drop me a message or comment below - I’d be happy to help!