It also prevents shareholders from being forced to remain in business with a new, unknown and possibly incompatible majority owner. Tag-Along/Drag-Along Rights Tag-along (aka piggy-back) -if controlling shareholder is selling shares, minority shareholders . Tag along rights are usually worded to state that if the tag along procedures aren't followed then any attempt to buy shares in the company is invalid and won't be registered. "Piggyback") right is or what it means to be subject to a "Drag-Along" (a.k.a. Under the concept, if the majority shareholder(s) of an entity sells their stake, the prospective owner(s) have the right to force the remaining minority shareholders to join the deal. Minority shareholders realize some benefits from a drag-along provision as well. In an instance where there is a bid for buying the entire company, and the majority shareholders holding more than 50% of the company agree to sell their shares, the majority shareholders shall have the right to drag along the remaining minority shareholders and require the minority shareholders to sell their shares so that the bidder is able to purchase the entire company. A USA is a specific type of shareholder agreement that is signed by all shareholders at the time it is first signed, binds all subsequent shareholders, regulates the business, and can regulate (or restrict) . A tag along provision has the opposite effect of a drag along provision. During a business sale, drag along rights allow majority shareholders to force minority shareholders to sell their shares as well (under the same or similar terms . Please reduce the size of your message to 600 characters. Groups Proportion multiplied by the amount of Purchase Price placed into escrow by the Shareholder shall also be placed into escrow and (b)any payment is made to the Third Party Purchaser (whether from such escrow or not) on account of Contact: Mike Volker, Tel: (604)644-1926, Email: mike@volker.org. The aim of drag along rights is to provide liquidity, flexibility and an easy exit route for a majority shareholder. Without such a clause, an obstinate minority owner or investor could hold out and refuse to sell, making it difficult for new owners to assume full control of a company or tanking the deal entirely. Explanation #1 - Control #2 - Protection Example of Tag-Along Rights #1 - Unclear definition of Majority #2 - Non Defining the Nature of Securities Covered Tag along vs. Tag along rights is designed to protect minority shareholders. A drag along clause will allow the majority shareholder to 'drag' the remaining minority shareholders with them and require them to sell their shares to the potential buyer at the same price, in order to allow the buyer to purchase the entire company. Enter to open, tab to navigate, enter to select, 24 hour Customer Support: +44 345 600 9355. Thus, "tag along rights" - the right to tag along on a deal - are often inserted in operating and shareholder agreements. Drag-along provisions make a company more attractive to potential buyers. It is a clause that is being negotiated. The majority shareholders percentage of shares is variable depending on the company's ownership mix and the negotiating strength of the shareholders but is normally between 51% - 75%. Drag along rights allows for the elimination of minority owners and the sale of 100% of a company to a potential buyer. The selling shareholder typically notifies other shareholders of their desire to sell their shares, and if a tag along right is exercised, the third party purchaser must also purchase the other participants' shares (they get to "tag . A tag along clause will prevent a key shareholder, or group of key shareholders, from selling their shares without giving the other shareholders a right to participate (or 'tag along') in the sale. Can a majority owner sell 30% of her shares without triggering the provision? As many buyers of a target company will want 100% control over the business and the minority shareholders may not wish to sell their shares and wish to stay with the limited ownership in the hope that share prices may rise it becomes difficult for the majority shareholders to get an easy exit from the company. Posted on April 3, 2022 Author admin. This should include the following: A sample statement that limits the warranties and representations given by shareholders forced to sell. Business Set Up; . This requirement is usually contained within aRight of First Refusal clause. The tag along rights act . Any notice sent in accordance with this clause4.5 shall be effective: (a)if mailed, 5 (five) business days after mailing; (b)if sent by messenger, upon delivery; and (c)if sent via facsimile, 1 9.4 Equity Issuances (collectively, the Bank Groups Shares) multiplied by the Bank Groups Percentage (as determined pursuant to clause 2.4 below)) on the same terms and conditions (per Share) as those set out in the While tag-along rights give the power to minority, drag-along rights are favourable to the buyer. They both relate generally to when an owner (or a group of owners) holding a certain percentage of the equity of a company (usually a majority) wish to sell their interests in the company to a third party. To speak with an attorney about your needs and how we may be of assistance, call (713) 909-7323 or contact us online. Transferring Shareholder. But, first lets understand what the Companies Act, 2013 (Act) outlines with respect to transferability of shares. Majority shareholders benefit from a drag-along provision by making it easier to find a potential buyer and by having more control over the sales process. Tag-Along is a helpful clause that allows them to join the majority shareholders. Services. 08081347754 . 2. Tag along rights. For example, majority shareholders A, B and C vote to sell 20 per cent of their shares, therefore, shareholder D also has the right to sell their shares in the same proportion. Tag along rights comprise a group of clauses in a contract which together have the effect of allowing the minority shareholder(s) in a corporation to also take part in a sale of shares by the majority shareholder to a third party under the same terms and conditions. Drag-along sale procedures should also be determined in advance if possible. A, For example, if the drag-along provision includes a notice requirement i.e., the majority shareholder must give advance notice of a sale and minority shareholders did not receive notice until after the transaction was completed, the courts may rule the provision unenforceable. A tag along right provides that the majority owner cannot sell a substantial portion of equity to a third party without causing the third-party buyer to acquire a proportionate portion of such minority owner's ownership interests upon the same terms being offered to the majority or controlling owner. Groups (i)Capital Notes issued pursuant to clause 5.4 of the Amending Agreement or Shares received from the conversion of such Capital Notes; "Drag-along Shareholder" has the meaning set forth in Section 3.03(a). 8. The Act states that the company is run by the directors appointed by the shareholders based on a majority decision. Tag-along rights protect minority shareholders from being left behind in the event a key shareholder exits the company. The majority owner doing. The majority shareholder who is 'dragging' the other shareholders must offer the minority shareholders the same price, terms and conditions that the majority shareholder has been offered. Treelife Ventures Services Private Limited. 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. Drag-along rights are enforceable if the drag-along provision is drafted properly and contained within a valid and enforceable contract, and if the transaction is executed according to the terms of the provision. Call us at (713) 909-7323 or contact us online to request a document or contract review. support@treelife.in. into which such Convertible Securities are then convertible. the Third Party Purchaser to purchase from the Bank Group the number of the Bank. 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. For example, if one majority investor receives a lucrative offer for his shares, due to the tag-along right, the minority . In this sense the aim is to protect minority shareholders . Consider an example: A and B are both shareholders in a company, with A being the majority shareholder and B the minority . Such a scenario is probably equitable, and if contemplated, would be the intent of the parties at the outset of the deal. For example, a majority shareholder who holds 75% of the shares in the company who agrees to sell their shares in a share sale to a potential buyer, must offer the same price for the shares to the minority shareholders if they want to 'drag them along'. Encouraging for investors Tag-Along right is usually a pre-negotiated clause and is added to the agreement. An attorney experienced with drafting and enforcing shareholder agreements and other corporate governance documents can help shareholders anticipate and address these and other contingencies and negotiate a favorable agreement. A drag along right allows a majority shareholder (ie usually a shareholder holding more than 50% of shares in a company that have voting rights attached) of a company to force the remaining minority shareholders (ie usually a shareholder holding less than 50% of shares in a company that have voting rights attached) to accept an offer from a third party to purchase the whole company. Drag Along Rights help to eliminate minority owners and sell 100% of a company shares to a potential buyer. However, the owner must usually offer the same terms and conditions to the minority shareholders as to the majority shareholder(s). A tag along rights clause allows minor shareholders to 'tag along' with a larger shareholder or group of shareholders if they find a buyer of their shares. The purpose of a tag along provision is to ensure minor shareholders are not left behind in the event a major shareholder decides to exit the venture. The aim of Drag Along Rights is to provide liquidity, flexibility and an easy exit route for a majority shareholder. When majority shareholders sell their shares, a Tag Along Right will enable the minority shareholders to participate in the sale at the same price and conditions for their shares as the majority shareholders. The right to appoint a director gives you the control to decide how the company will be run and provides an assurance to you that there will a director on board who understands your position as a shareholder. The minority shareholders can hamper a smooth exit of management or an investor from the company in some situations. It should serve as food for thought. The purpose behind drafting this clause is to make sure that if a major shareholder decides to exit the venture, it would not result in the minor shareholders getting left behind. Drag-along right (DAR) is a legal concept in corporate law.. Where a majority shareholder is looking to sell its shares, a tag-along right enables the minority shareholders to exit from the joint venture by obliging the selling majority shareholder to procure that the prospective third-party purchaser extends its offer to include the shares of the minority shareholders on broadly the same terms. into effective as of September28, 2006, by and between: NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and Shareholders, make sure your interests are protected with solid, enforceable shareholder agreements. Shares are then listed for trading or submitted for quotation), such that, immediately following any such sale, the Shareholder would cease to be the largest "Effective Date" has the meaning set forth in the preamble. Therefore, an investor while at the time of investing in a private limited company needs some rights to be included in the SHA to secure his exist and the investment. This helps protect the majority and eliminate the minority. A tag along provision is a clause that allows minor shareholders to 'tag along' with a larger shareholder or group of shareholders if they find a buyer of their shares. Securities sold and/or (ii)a fraudulent misrepresentation fraudulently made by the Shareholder (such payment, after such exclusion, an Indemnification Payment), the amount to be released from such escrow to the Bank Group Thats why you need a tag-along provision in case the majority shareholder does not exercise the drag-along provision and the minority shareholder wants in on the deal. Drag along with Clauses Advantages Disadvantages Conclusion Recommended Articles Explanation In this blog lets understand the meaning and uses of Tag and Drag Along Rights. As many buyers of a target company will want 100% control over the business and rarely agree to allow a minority shareholder to retain a minority share, it would be difficult for a majority shareholder to accept an offer if the minority shareholders are uncooperative and block the sale of a company. Drag along rights require the minority shareholders to sell their shares to a bona fide purchaser, on the same terms and for the same price as a majority shareholder. Drag-along provisions make a company more attractive to potential buyers. Business Set Up; Contracts; . The Bank shall be entitled, by written notice given to TIC within 20 (twenty) days of receipt of the Offer Notice, to join (and, if applicable, have its Affiliates This ensures that the buyer can received 100% of the shares. All Rights Reserved. Will expenses be pro-rated accorded to ownership interest or charged solely to the shareholder who invoked drag-along rights? It is not a formal pre-requisite to registration of a company, but it is advisable to enter into one with your fellow shareholders. What Are Drag-Along Rights in a Shareholder Agreement? Majority shareholders, therefore, include the Drag Along Rights provision in the SHA that gives them the power to compel the minority shareholders to sell off their shares at a price determined for majority selling shareholders and on the same terms and conditions. For example, a 'tag along' provision can be included which is a right entitling, usually a minority, shareholder to participate in a sale by the other, usually majority, shareholder at the same time and the same price being . Drag-along rights protect against a few shareholders holding out for a better deal in the event that majority of the other shareholders wish to sell the company. Another notable point is that even though Drag Along Rights are meant to protect the majority shareholder of a company,they are also beneficial for minority shareholders. It aims to provide liquidity, flexibility and an easy exit route for a majority shareholder. Pre-emptive rights, rights of first refusal, piggy-back/tag-along rights and drag-along rights are some the most common and significant provisions in any . Tag along Rights Shareholders Agreement. Well take you through and answer the questions you may have. 4 min read Tag along Rights often concern the right of first refusal of stakeholders. DRAG-ALONG RIGHT; - is an important concept under Corporate Law. A tag along, or piggyback right, is triggered when a shareholder wants to sell their shares to a third party. Drag along rights forces the minority shareholders to be dragged for company's sale at the same price and terms. 2022 Thomson Reuters. 914/15/16 Pinnacle Corporate Park, Near Trade Centre, Bandra Kurla Complex, Mumbai 400051. The possibility of other views on the subject matter cannot be ruled out. It governs the shareholders' rights, obligations and liabilities. Having this right means, a minority shareholder, will be given the opportunity to purchase the shares, before they are released to any individual or entity outside of the company. Shareholder Drag-Along and Tag-Along Rights. A drag-along right, drag along provision, or bring along right, is a right that gives majority investors the ability to sell a company to a third-party without consent from minority shareholders. Tag along rights Tag along rights give the minority shareholder the right to sell its stake in the company by joining a majority shareholder selling its stake. escrow to secure representations, warranties or covenants (other than those related to the Shareholder (and not Tower) and/or its title to the Shares and/or Convertible Securities being sold), a portion of the Purchase Price equal to the Bank 1800 730 617 . (ii)Capital Notes and/or convertible debentures issued as part of the Clause 9.4 Equity Issuances or Shares received from the conversion of such Capital Notes and/or convertible debentures; and (iii)Shares received as part of the Clause 1st floor, Mahalakshmi Chambers, MG Road, Trinity Metro Station, Bengaluru 560001. For the avoidance of doubt, (a)in the event the transactions contemplated by an Offer Notice shall not be consummated by the Shareholder for any reason, the Both drag along rights and tag along rights can be very beneficial in an LLC Operating Agreement or a corporation's Shareholder Agreement. What percentage of ownership will trigger the provision? 3 Apr. A Standard Clause in many shareholder agreements including unanimous shareholder agreements (USAs), a tag-along (or co-sale) provision, gives minority shareholders the right to participate on a pro rata basis in any controlling shareholder's sale of its interests in the corporation to a third party. 1. contains sample provisions for a shareholders agreement discussed in this Outline. Without tag along rights, minority shareholders may find that they hold unsalable or devalued shares. The basic idea behind this restriction is to ensure that the existing shareholders is not forced to accept an unwanted new shareholder. Provisions commonly found in a SHA can include acompulsory transfer of shares, pre-emption rights, Tag Along Rights (Tag Along Rights) and Drag Along Rights (Drag Along Rights). For the avoidance of doubt, as determined pursuant to clause 1.3 above), the Shareholder may only sell such Shares or Convertible Securities if it complies with the provisions of this clause2. It is based upon relevant law and/or facts available at that point in time and prepared with due accuracy & reliability. Tag Along Rights. Tag-along rights protect minority shareholders from being left behind in the event a key shareholder exits the company. (Note - this is just a sample agreement to give the reader some basic ideas. Tag along rights are also known as 'co-sale rights' are the inverse of drag along rights. Tag-along rights also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. In a well-formulated and balanced shareholders` agreement, if a shareholder wishes to sell his shares, he must generally inform the other shareholders. Major shareholders, such as venture capital firms, often have a greater ability to . What is the threshold? It protects both the corporate entity and the shareholders' investment in that entity. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended, or any successor federal statute, / +91 022 6852 5768. tag-along right is also called 'co-sale rights', a tag-along clause can be found in a company's article of association or a shareholder agreement, it is a written expression of the tag-along right explicitly stating the procedure to be adhered to by the majority shareholder in the event he/she wishes to sell his/her share so that the minority Drag-along rights are not automatic, however. Our firm also offers general counsel services. It right protects the majority shareholder. valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: If TIC and/or any of its Subsidiaries (collectively, the Shareholder) proposes to sell, in one or a series of related transactions, any of its If youre a startup founder looking to raise funding or understanding the various nuances of a SHA, please reach out to us. Readers are requested to check and refer to relevant provisions of the statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. China contracts, and software-as-a-service agreements. case or situation. For many investors, the most important parts of a USA deal with the purchase and sale of their shares. to a different third party or on terms and conditions other than as set forth in the Offer Notice or in the event that the transaction is not consummated 2022. Whether youre a majority or minority owner, drag-along provisions can be structured to provide benefits for both parties and blend holistically with a companys governing documents and overall goals. Some shareholders, such as venture capital investors or angel investors, may require that drag along provisions are conditional and limited, or contain certain exceptions. aforesaid, nor shall any person comprising the Bank Group be required to agree to any undertakings except to deliver the Shares and/or Convertible Securities to the Third Party Purchaser against payment therefor in accordance with this clause 2, A standard clause in many LLC agreements, a drag-along provision gives a majority member wanting to sell to an unrelated third party all or a substantial percentage of its membership interests in the company the right to force the other members to also sell . Whereas tag-along rights give minority shareholders negotiating rights in the event . I am often asked to explain what a "Tag-Along" (a.k.a. Drag along and tag along clauses in shareholder agreements can help protect the interests of company owners and shareholders alike. writing as above provided. By their nature, tag along rights are generally granted to minority shareholders. The expression "drag along" comes from the idea that the minority shareholders are being forced against their will to sell their shares. All rights reserved. This way, the . Drag-along rights protect majority shareholders by stopping them from being 'locked in' to the company as well as ensuring that . THIS TAG ALONG AGREEMENT (this Agreement) is made and entered It is by no means perfect and reflects the biases and priorities of the writer. Many factors shape the use of labelling rights. It also prevents shareholders from being forced to remain in. What are tag along rights? A clause in the SHA giving a Drag Along Rightallows the majority shareholders a right to require the minority shareholders to sell their shares. The Shareholders Agreement - A Sample Agreement. Triggering events are among the elements of a drag-along provision that should be negotiated and determined prior to signing or investing. Is designed to protect the majority shareholders in case they find a buyer wishing to take over complete control of the company. For the avoidance of doubt, the Per Share Price for Capital Notes and/or convertible debentures of Tower held by the Shareholder shall be the total purchase price offered for such Convertible Securities divided by the number of Shares All rights reserved. A tag-along provision is essentially the opposite of a drag-along provision: Instead of being dragged into a sale, minority shareholders can tag along with any deal a majority shareholder makes to sell shares to a third party. holder of: (a)the then issued and outstanding Shares (for the avoidance of doubt, not taking into account any Convertible Securities); or (b)the Shares on a fully-diluted basis, taking into account the Convertible Securities (for the This provision prevents a situation where a minority shareholder has the ability to block the sale of a company that was going to give an exit to the majority shareholder or a collective majority of existing shareholders. Now let us understand the meaning of Drag Along and Tag Along Rights. A guide with complete lifecycle of startup, Understanding Tag and Drag Along Rights in a Shareholders Agreement. In order to summarize why are Tag Along and Drag Along Rights needed we can put forth the following points . The minority shareholder then 'tags along' with the majority shareholders in the sale. This rule says that in the event that a majority shareholder decides to sell their stake in a company, minority shareholders have the right to offer up their shares in combination with the majority stockholders'. A shareholders agreement is a private contract between "Co-Sale") provision. Tag alongs, in effect, oblige the majority shareholder to include minority shareholders in any sale negotiations. avoidance of doubt, no placement into escrow and/or sharing in an Indemnification Payment as aforesaid shall be construed to mean that the Bank Group has any liability whatsoever to any person, including the Third Party Purchaser, on account of the representations, warranties or covenants of the Shareholder, such placement and/or sharing representing only an adjustment between TIC and the Bank of the tag along right granted pursuant to this clause 2 to reflect when the Purchase Price is When the promoters or Majority shareholders transfer their shares to incoming investors, the existing minority shareholders can tag along. What types of transactions will trigger the drag-along provision? 2022Thomson Reuters. or viewing does not constitute, an attorney-client relationship. By the use of the said information, you agree that the Author / Treelife Consulting is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. Investors and majority shareholders should pay close attention to this provision and its elements when crafting or negotiating these governing documents as it may impact the terms of any future sale of the company.