What are Drag-Along and Tag-Along Rights?
Drag-along and tag-along rights are provisions in shareholder agreements that govern how shares can be sold when some but not all shareholders want to sell. These provisions balance the interests of majority and minority shareholders in exit scenarios.
Drag-Along Rights
Allows majority shareholders to "drag" minority shareholders into a sale. Forces minority to sell their shares if majority approves an acquisition.
Tag-Along Rights
Allows minority shareholders to "tag along" with majority shareholders' sale. Gives minority the right to sell their shares on the same terms.
Why Both Provisions Exist
Together, these provisions solve two problems:
- • Drag-Along: Prevents minority shareholders from blocking a beneficial acquisition
- • Tag-Along: Prevents majority from selling without offering minority the same opportunity
Drag-Along Rights Explained
Drag-along rights enable majority shareholders to force minority shareholders to participate in an approved sale of the company.
How Drag-Along Works
Step 1: Buyer Offers to Acquire Company
Buyer wants to acquire 100% of the company and offers to purchase shares from all shareholders.
Step 2: Majority Approves
Shareholders holding the required percentage (e.g., 75%) approve the sale.
Step 3: Drag-Along Triggered
Majority exercises drag-along rights to require all other shareholders to sell on the same terms.
Step 4: 100% Sale Completed
Buyer acquires 100% ownership; all shareholders receive sale proceeds.
Key Drag-Along Terms
- Trigger Threshold: What percentage must approve (typically 50-75%)
- Board Approval: Often requires board approval in addition to shareholders
- Same Terms: Dragged shareholders get identical price and terms
- Representations: Limitations on representations dragged shareholders must give
- Notice Period: Time dragged shareholders have to comply
Tag-Along Rights Explained
Tag-along rights (also called co-sale rights) give minority shareholders the right to participate when majority shareholders sell their shares to a third party.
How Tag-Along Works
Step 1: Majority Shareholder Gets Offer
A shareholder (or group) holding majority receives an offer to sell their shares to a third party.
Step 2: Notice to Other Shareholders
Selling shareholder must notify other shareholders of the offer and terms.
Step 3: Tag-Along Election
Other shareholders have right to sell pro-rata portion of their shares on same terms.
Step 4: Sale Completed
Buyer purchases from both original seller and tag-along sellers on identical terms.
Key Tag-Along Terms
- Pro-Rata Rights: Tag-along is typically pro-rata based on ownership
- Same Terms: Must receive identical price, representations, and warranties
- Notice Period: Time to exercise tag-along rights (typically 15-30 days)
- Exceptions: Transfers to affiliates, family trusts often excluded
- Minimum Threshold: Sale must exceed certain size to trigger tag-along
Comparison and Interaction
Drag-along and tag-along work together but serve different purposes and different shareholder groups.
| Aspect | Drag-Along | Tag-Along |
|---|---|---|
| Benefits | Majority shareholders | Minority shareholders |
| Trigger | Majority approves sale | Majority sells to third party |
| Effect | Forces minority to sell | Allows minority to sell |
| Typical Use | 100% company sale | Partial stake sale |
| Negotiation | Founders want high threshold | Founders want strong rights |
Key Terms and Provisions
Drag-Along Threshold
What percentage of shareholders must approve to trigger drag-along:
- 50% + 1 share: Simple majority - easier to trigger
- 66% or 75%: Supermajority - requires broader consensus
- Plus board approval: Additional governance check
Exceptions and Carve-Outs
Common exceptions to drag/tag-along:
- • Transfers to affiliates or subsidiaries
- • Estate planning transfers (family trusts)
- • Small transfers below a threshold (e.g., <5%)
- • ESOP-related transfers
- • Transfers with company consent
Negotiation Strategies
For Founders
- • Drag threshold: Push for 66-75% + board approval
- • Tag-along: Ensure strong pro-rata tag-along rights
- • Exceptions: Negotiate reasonable carve-outs
- • Representations: Limit personal liability in drag scenarios
For Investors
- • Drag-along: Want ability to force sale if needed
- • Threshold: Prefer simple majority or investor majority
- • Tag-along: Protect against founders selling without them
India-Specific Considerations
Legal Framework
- • Drag/tag-along provisions are governed by contract (SHA)
- • Not statutory rights under Companies Act
- • Must be explicitly included in shareholder agreement
- • Courts generally enforce well-drafted provisions
Practical Implementation
- • Include in SHA from first institutional round
- • Define drag-along thresholds carefully
- • Specify notice requirements and timelines
- • Consider stamp duty on transfer deeds