How do Drag-Along + Tag-Along Rights work in a Shareholders' Agreement?

What are Tag-Along Rights?

Tag-along rights give non-selling securityholders the right to sell alongside the selling securityholder (ie, the selling securityholder can't complete its sale unless the proposed purchaser also offers to buy out the tagging securityholders).

What are Drag-Along Rights?

Drag-along rights give the selling securityholder the right to force the non-selling securityholders to also sell to the proposed purchaser.  

This is particularly important where the proposed purchaser will only complete if it gets 100% ownership.

Check you Shareholders' / Unitholders' Agreement

Depending upon the terms of your Shareholders' / Unitholders' Agreement, generally both Tag-along and/or Drag-along rights apply in the event of a proposed sale of shares by a securityholder.

Generally tag/drag rights will only apply:

✅ After the transfer pre-emption provisions have been followed;

✅ If the remaining securityholders do not offer to purchase all of the sale securities;

✅ If the seller then elects to sell all of the sale securities to a bona fide third party; and

✅ If the size of the proposed sale exceeds specified thresholds.

What if there is no Shareholders' / Unitholders' Agreement?

If there is no Shareholders' / Unitholders' Agreement, then the above tag-along / drag-along rights will not be able to be exercised.

Once there are multiple Shareholders / Unitholders it is often too late to get them all to unanimously agree to enter upon agreed terms of a Shareholders' / Unitholders' Agreement.

The ideal time to establish these important rights is in a Shareholders' / Unitholders' Agreement entered at establishment.

That is, before more than 1 Shareholders / Unitholders subscribe for securities.

If you would like the tag/drag rights to apply in the above and/or any other circumstances, we recommend you obtain legal advice at the time the Shareholders' / Unitholders' Agreement is being drafted.

Typical Thresholds Triggering Tag-along rights

Tag-along rights will apply if a proposed sale would result in a third party acquiring a certain level of voting power or more.  

Please note that, since the threshold is linked to voting power, a choice of 100% can make sense where the intention is to permit the holders of non-voting securities to tag along in an exit by the holders of all voting securities.  

Voting power threshold for tag-along rights is typically 80-90%.

This is a percentage of the total securityholder voting rights.

The tag-along rights will only apply if the sale would result in a third party acquiring this level of voting power or more.

Typical Thresholds Triggering Drag-along rights

Voting power threshold for drag-along rights is typically 80-90%:

This is a percentage of the total securityholder voting rights.

The drag-along rights will only apply if the sale securities carry in total this level of voting power or more.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.