What Are Drag-Along Rights?

Drag-along rights are rights in a company’s articles of association or shareholders’ agreement allowing majority shareholders to require minority shareholders to sell their shares as part of a sale of the company. 

If a buyer wants to buy a company and most of the shareholders are willing to sell, but a minority shareholder refuses, that minority shareholder could delay or even derail the entire sale without drag-along rights. 

Drag-along rights avoid this situation by allowing the majority shareholders to "drag" the remaining shareholders into the sale. They matter because buyers may want to acquire full control of a company rather than having minority shareholders they do not know in the company after completion. 

So, potentially yes! If drag-along rights are included in your company’s articles or shareholders’ agreement, and the conditions are met, you can be forced to sell your shares! 

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How Is That Fair?

At first glance, the idea of being forced to sell your shares may seem unfair.

However, being forced to sell may not always mean that you have been treated unfairly. Drag-along rights are typically drafted so that the minority shareholders receive the same price and terms as the majority shareholders. 

It is also common that the “dragged” shareholders will only have to give basic warranties such as ownership and title of their shares and their authority to sell them, rather than extensive warranties about the company. 

Also, minority shareholders often have another protection in the company’s articles (or the shareholders’ agreement) called “tag-along” rights. These rights allow you to “tag” yourselves to a sale where a majority shareholder decides to sell their shares. You can then join in on the same exit opportunity, instead of being left behind. 

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What Should I Look Out For? 

Not all drag-along and tag-along provisions are the same. There are a number of points you could look out for: 

1. What is the trigger? 

For drag-along rights, the articles will usually set out a minimum shareholding threshold that wishes to sell before a “drag” can be exercised. For tag-along rights, check whether your right to tag arises whenever a majority shareholder sells its share, or only where the sale results in a change of control in the company. 

2. Have you got the same deal as the majority? 

It is important to check whether you will receive the same price per share as the majority shareholders, and whether there is any different treatment or pricing formulars that apply to a particular class of share. 

3. What are you entitled to know? 

There are usually notice provisions in the articles that set out what you should be informed of before being “dragged” into a sale or deciding whether to “tag” yourself in a sale. 

4. What happens if the buyer is not paying cash? 

Not all acquisitions are funded entirely in cash, a buyer may propose to pay using shares in another company, loan notes, earn-out, or deferred payment. Will you be forced to accept these arrangements?  

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Our Corporate team at FMGS has strong experience in advising on shareholder agreements, articles of association, business sales and exits. Please get in touch with us at 01254 828 410 or via email at enquiries@fmgs.co.uk for an initial discussion. 

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This article is for information purposes only and is not intended to amount to legal advice to any person on a specific case or matter.