What is the difference between tag along and drag along?

What is the difference between tag along and drag along?

Tag-along or co-sale rights are essentially the opposite of drag-along rights. Whereas tag-along rights give minority shareholders negotiating rights in the event of a sale, drag-along rights force the minority shareholders to accept whatever deal is negotiated by majority shareholders.

Can you have both drag along and tag along?

3. Drag along. Whereas a ‘tag along’ clause provides protection to small investors, a ‘drag along’ provision protects the interests of the major shareholder(s). A ‘drag along’ clause allows a large shareholder (or group of shareholders) to ‘drag’ the other shareholders into a joint sale of the entire venture.

What is a drag and tag clause?

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

Are drag along rights common?

In most cases, the controlling majority, or a minimum of 51 percent are allowed to hold a vote to trigger a drag-along the sale. However, 66 percent may be the ideal rate depending on the company. Voters are usually preferred stockholders. Common stockholders might also be included, but this is rarer.

How does drag along work?

A drag-along right is a provision or clause in an agreement that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

What is the purpose of drag-along rights?

A drag along right allows a majority of shareholders to force minority shareholders to join the majority in a sale of the whole of the company to an unrelated third party. The expression “drag along” comes from the idea that the minority shareholders are being forced against their will to sell their shares.

Who benefits from drag along rights?

Drag-along rights and tag-along rights are important forms of investment realisation in a shareholders agreement. Drag-along rights favour the majority shareholder while tag-along rights are more beneficial to the minority shareholder.

How do drag along rights work?

What is a drag along transaction?

What is the purpose of drag-along right?

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.

Who benefits from drag-along rights?

Can a minority shareholder sell their shares?

If we can’t come to an agreement, there’s no simple way to compel the minority shareholder to sell. In general, the majority shareholder will need to address the minority’s reasons for refusing to sell, convincing the minority to accept a fair value for their shares.

What are “drag along” and “tag along“ rights?

“Drag Along” and “Tag Along” rights are used by investors to facilitate their exit from an investment. They are methods particularly favored by private equity firms , who almost always do their best to establish a clear exit strategy even before they decide on investing in a company.

From the majority owner’s perspective, a drag along transaction can be triggered by all types of sales: mergers, the sale of substantial assets of the company, sale of company securities, and acquisitions. In most cases, companies include drag along rights in the definition of “transfer”.

What are drag along rights in a transfer?

In most cases, companies include drag along rights in the definition of “transfer”. For example, the term “transfer” may be modified to include “majority owners may trigger drag along rights during a transfer of a specified amount of its ownership stake

What are drag along-rights?

Drag along-rights are put in place during investment negotiations between a company’s majority shareholder and minority shareholders. If, for example, a technology startup opens a Series A investment round, it does so to sell ownership of the company to a venture capital firm in return for capital infusion.