In business there are times when you will actually want to drag others along or to tag along yourself. Drag-Along and Tag-Along clauses are very, very, (one more) VERY useful clauses when selling your company. Essentially these clauses ensure that neither the business owner (usually the majority holder of the shares) nor the investor (usually the minority holder of the shares) in a company gets held up or left behind (respectively). Let’s take a closer look so that you can appreciate the beauty of these legal mechanisms.
You have a company in which you hold the majority of the shares. The minority of the shares is held by your investor. Your company has been doing well BUT you want to move on and branch out into other industries. You consider selling your majority shareholding to a buyer – Buyer A.
Buyer A offers you a great price BUT he wants ALL the shares in your company. Your investor thinks the company is doing well and doesn’t want to sell its shares. How do you get around this? You review your investment or shareholder contract and you see the following clause:
“If the holder of majority of the Shares in issue for the time being (Selling Shareholder) wishes to transfer all (but not some only) of its Shares (Seller’s Shares) to a bona fide purchaser on arm’s length terms (Proposed Buyer), the Selling Shareholder may require all other Shareholders (Called Shareholders) to sell and transfer all their shares (Called Shares) to the Proposed Buyer (or as the Proposed Buyer directs) in accordance with the provisions of this clause (Drag Along Option).”
You realise that you can MAKE your investor sell his shares to Buyer A. The Drag-Along clause enables a majority shareholder to force a minority shareholder to join in the sale of a company. The only catch is that the majority shareholder doing the dragging must give the minority shareholder the same price, terms, and conditions that it is receiving. This is a very basic example of a Drag-Along clause. A good lawyer would make this way more sophisticated for you and your investor. For example, there may be a trigger for the clause so that the offer from Buyer A must be above a certain amount before the Drag-Along clause can be activated or the majority shareholder may need board approval.
As with most things in life there is a FLIP side. What if you are the investor, a minority shareholder in a company, and the majority shareholder wants to up and sell its shares to a buyer – Buyer B. You may not want to go into business with this strange new Buyer B or, recognising that it would be difficult to sell a small number of shares for a decent price, you may want in on the great price being offered to the majority shareholder; this is where you TAG along. You are protected by the following clause in your investment or shareholder contract:
“If, in one or a series of related transactions, one or more Sellers propose to transfer any of the Shares (Proposed Transfer) which would, if carried out, result in any person (Buyer) acquiring a Controlling Interest in the Company, the Non-Sellers may also transfer their shares as part of the Proposed Transfer.”
You are ecstatic because due to the fact that Buyer B is buying the majority shareholding giving it a “controlling interest”, you realise that you have a right to tag along to the sale to Buyer B. If you activate this right, the majority shareholder has to include your interest in any negotiations with Buyer B and Buyer B has to buy your shares too. You have tagged along.
Essentially Drag-Along and Tag-Along clauses are all about protecting the parties on a sale. These clauses also help to keep the value of the company up; it would be very hard to sell a minority shareholding at a competitive price and likewise it is usually more attractive to a buyer to be able to buy the entire shareholding.
So there you have it, as with many of my posts, you just cannot beat the experience of a good commercial lawyer. So, whilst I hope this post has been helpful in furthering your legal knowledge and assisting you in instructing your lawyer more intelligently, DO NOT do this yourself. The examples in this post are extremely basic. In reality these clauses are complex and there are many wonderful things your lawyer can recommend to you depending on the particulars of your business – family run, startup with friends, employee shares involved etc.
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