Drag-along clause – Shareholders Agreement

What is a drag-along clause and when should you use it?

A Drag-Along Clause is used in a Shareholders’ Agreement to protect the interests of the Majority Shareholders.

It protects the interests of the Majority Shareholder by enabling a majority shareholder to force a minority shareholder to join in the sale of a company.

For example, if a third party offers to buy out a company and the majority shareholder wishes to accept the deal, a drag-along right will ensure that minority shareholders accept the buy-out.

Basically the minority shareholders are dragged into accepting the deal on the terms negotiated by the majority shareholder.

Generally, a Drag-Along Clause is appealing to buyers because some buyers are only looking to have complete control of a company.

Thus, drag-along rights allow for a clean transaction by ensuring that minority shareholders cannot refuse to sell their shares to the buyer.

Since the minority shareholders aren’t left to disrupt the plans of the buyer, the buyer can then buy 100% of the company’s shares and become the new owner.

You’ll find a drag-along clause included in our Shareholders Agreement template

You may also want to consider a tag-along clause.

A Tag-Along Clause protects the interests of Minority Shareholders.

In the case of the majority shareholder selling out, the Tag-Along Rights allow the minority shareholders to jump on the back of the buy-out.

What else might you need?

To get a better understanding of Shareholder’s Agreements and how they work we’ve got some great guides to help you:

Shareholders Agreements

Protect your interests with a shareholders agreement

We’ve also got a useful checklist to help you when drafting your shareholders agreement.