"Effective Date" has the meaning set forth in the preamble. The Principles of Fairness and Equity have transcended from public laws/rights and can be found in private contracts by private corporations, one of the most important agreements for a Company is a Shareholder Agreement, it defines the rights, obligations, interests, and procedure for every shareholder of a company. [1], Minority shareholders may want to remain part of the company going forward and might not be content with receiving payment for their shares regardless of the price offered. Nonetheless, the exercise of rights arising from the clause introduces a third party buyer into the equation making it tripartite. Drag Along, Tag Along Clause for Shareholder Agreement Drag Along, Tag Along Clause for Shareholder Agreement $2.29 This drag along, tag along clause can be inserted into a shareholder agreement to govern how the sale of shares from a shareholder to an arm's length third party must be conducted. These clauses can be structured in different ways. 5. Similarly, if most shareholders receive an offer from a buyer for 100% of the Company, some shareholders may be "dragged along" and forced to sell their shares) A tag along or take along provision gives a minority shareholder the right (but not the obligation) to have his shares bought on the same terms (including price) as majority shareholders. Noncompete Clauses: Without this clause in a shareholder agreement, existing and former shareholders may take undue advantage of access to proprietary and confidential . Katz, principal of Anton M. Katz Barrister & Solicitor, says the mechanisms kick in after a shareholder secures an offer from a third party willing to buy their shares. Despite being a contractual conception, there exits some statutory provisions under Nigerian law bearing similarities with drag-along and tag-along clauses, particularly Section 129 and Section 130 of the Investment and Securities Act 2007 (ISA). Usually the existing shareholders will have the right to buy the exiting shareholder's shares: in proportion to their existing shareholdings (unless the agreement gives priority to a particular shareholder or shareholders); and. For example, if you own 10% of the company's shares and you have a tag along right, you would be given the opportunity to sell 10% of the total parcel of shares that are being sold. The drag along clause requires the minor shareholder to sell their shares. Although drag-along rights are more likely to protect the controlling shareholder(s), minority shareholders can often benefit from them as well. The tag along clause requires the minor shareholder to be allowed to join in on a sale. the outgoing shareholder can be required to procure that a third party purchaser . In case of a natural person: [insert the name of the natural person], residing at [insert the address of the natural person] ('[insert abbreviation]') In case of a legal entity: [insert the corporate name], a [insert company type] at a price that is not lower than the price offered to any potential third party buyer. The Tag-Along Clause is incorporated to protect the interest of the minority shareholder as explain, moreover, it bestows an obligation on the majority shareholder to adhere to the procedure instead of freely selling his/her share, which can be perceived as a drawback for the majority shareholders and cause consternation before investing in some organization which contains the rule of tag-along right in their article of association or shareholder agreement, in order to proffer certain upside the following can be done:-. Drag along clauses are essentially a right that majority shareholders possess. For example: The answers to these questions will depend on your circumstances. 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. For example, Right to tag along can only be exercised once the Right to the first refusal is exercised by the shareholders. While the shareholders' agreement did not include what are commonly known as "drag-along" 1 A "drag-along" clause is a clause that allows majority shareholders to force minority shareholders to participate in a sale (usually on the same terms as the majority shareholders) and "tag-along" 2 A "tag-along" clause is a clause that . This article will aim to explain what tag-along rights are, their advantages and disadvantages and how to draft them effectively by considering all the factors. 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). A shareholders agreement in relation to the landowning company contained drag-along provisions saying that if three original shareholders wanted to sell their shares in the company to a buyer in good faith in an arms length transaction, the other shareholders also had to sell their shares to that buyer on the same terms. a shareholders' agreement between shareholders of a private limited company is a contract that details the various provisions that will govern each of the shareholders who are party to the. The tag-along rights protect the minority's interest in such events. Now let us understand the meaning of Drag Along and Tag Along Rights. The main considerations will be the composition of your share register and the extent to which the company's success is dependent on specific shareholders, the maturity and profitability of the business, and the shareholders' intentions generally in relation to an exit or other liquidity event. All rights reserved. The court further held that the investor had not acted in good faith having treated all shareholders equally in the transaction, including those dragged along under the shareholders agreement and the transaction had been an arms length one because there had been no prior connection between the three shareholders and the investor before it was agreed. "Drag-along Shareholder" has the meaning set forth in Section 3.03(a). (3) Any such holder may, within three months from the giving of the notice to him, require the transferee company to acquire the shares in question. J~` ;k6t"a$kkUmfCTI*EuYX`PgH#{Ww2e4'%`G3A/ >2l2$y\T@s#J^pM43YCZ>sg%iS|!rhrhQdwgryRrAJc|"Q71 This requirement is usually contained in a "right of first refusal" clause. The majority owner doing. These provisions usually occur in the case of a merger or acquisition of the company, since they help to eliminate objection of minority shareholders and sell the full value of the company. Drag-Along and Tag-Along clauses can help . How much does a shareholders agreement cost? However, if they dont have the required funds readily available to purchase the shares, the provision will be inconsequential or of little use. 3FON^Ktt$AY,h>!_n6"5` "|`T+|`Ylv#QL;R;2EB1g=, qh csbipNuNw_-2}f):"Y/?oo8hk*Q8N1!u ", 6qi.F MV-H:&%.s#|<>8dMwuSxm~}~ xHi'6 Follow us onInstagramand subscribe to ourYouTubechannel for more amazing legal content. (1) This section shall apply where, in pursuance of any such scheme of merger, shares in a company are transferred to another company or its nominee, and those shares together with any other shares in the first- mentioned company held by, or by a nominee for the transferee company or its subsidiary at the date of the transfer comprise or include nine-teenths in value of the shares in the first-mentioned company or of any class of those shares. of shares to be sold 1300, however, if the buyers refuse to purchase these additional 300 shares then the shares of majority shareholder and tagged along shares will be reduced 23% (23% reduction of 1000= 770 + 23% reduction of 300= 230 approx) making total share to 1000 again which was the acceptable range for the buyer. They confer on shareholders' relations an increased intuitu personae character, the Beneficiary indicating that its presence in the company is directly linked to the presence of the Transferring Shareholder. Level 18, 56 Pitt Street, Sydney NSW 2000P: +61 2 9229 2922 | E: info@turtons.com. F Tag-along rights do not require a minority shareholder to sell; they simply give shareholders the option to tag-along and sell their shares along with the majority shareholder. A shareholders agreement will normally address the situation where one or more parties wish to exit the venture, or where there is a falling out between shareholders. For example, a buyer may want to acquire a 75% stake in a company, in order to be able to pass what are called special resolutions. The difficulty with mediation is that it is not guaranteed to produce a result. Other deadlock and dispute resolution provisions. A shareholders agreement is an arrangement among shareholders describing the rights and obligations of shareholders and regulating the relationship between shareholders and management of a company. Each party delivers a single, sealed offer to a third party specifying a price at which they are prepared to sell. Shareholders' agreement 2 SHAREHOLDERS' AGREEMENT [Note: only the scenario of two shareholders has been developed.BY AND AMONG 1: 1. This type of exception could apply to all shares held by the key shareholder, or a small portion. . undertake strategic initiatives, such as raising capital, buying businesses, implementing employee share schemes, designing and implementing exit strategies and selling businesses. It is not uncommon for a key shareholder to seek exceptions to a tag along clause. This clause sets out rights of shareholders in the event that a third party wishes to purchase the whole of a company. 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). At first glance, these clauses appear bilateral, that is between majority shareholders and minority shareholders. 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. Tag along rights give a shareholder the right to join (or 'tag along' with) another shareholder if they find a buyer for their shares. Occasionally a 'tag along' right is included (i.e. "Tag along rights" are rights that are commonly included in shareholders' agreements. Drag-Along and Tag-Along Rights. Level 18, 56 Pitt Street, Sydney NSW 2000P: +61 2 9229 2922 | E: info@turtons.com. (A deadlock is a situation where the company is unable to do something because the Board or shareholders cannot agree on the best way forward.). Nonetheless, shareholders may set a lower threshold in a drag-along clause. Unless GST is expressly included, the consideration expressed to be payable under any other clause of this agreement for any . Many factors shape the use of labelling rights. 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. It is a clause that is being negotiated. A drag along (also known as a bring-along) provision forces a shareholder to sell his shares on the same terms as the majority of shareholders who approve of the sale. You have successfully registered for the webinar. The shareholders agreement contained a tag-along clause. L~aU50m\7*Wa#q ^J[dehWv`77hlI+YM.8'[%AaUW+dO`|-{2Nach/i3Qy,R2pU"2) z{7@[K3VdLg)y|6pb LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. Tag Along provision in shareholders' agreement (Right to Minority Shareholders) Tag along rights are also known as 'co-sale rights' are simply those rights which mostly benefit the minority shareholders. 3:zAofT37B"6y2% S}/=/A[Mc'g42ng+ 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 can be an important protection for an investor or other minority shareholder in a shareholders agreement. If majority shareholders are able to find a buyer willing to purchase the whole value of the company, they can drag along or force the minority shareholders to partake in the sale whether or not the minority shareholders are content with the sale. 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. For example, as the key shareholder, you might ask for a small portion of your shares to be exempt from the tag along clause - so that if you can find a willing buyer, you can be permitted to sell those shares and be partially rewarded for your contribution, without diluting other shareholders. If you would like more detail, we would encourage you todownload ourcomprehensive guide. The type of majority required to invoke a drag along depends on the agreed threshold. What does a shareholders agreement cover? Investors may seek to amend the shareholders agreement to make drag along rights conditional. This way, the sale or transaction of the company cannot be impacted by the refusal or a minority shareholder. As such, they have to be agreed upon by the parties beforehand in a shareholders' agreement. The three original shareholders agreed to the deal, and told the other shareholders they had to transfer their shares to the subsidiary too, under the drag-along provisions in the shareholders agreement. One of the drawbacks of arbitration is the time and cost involved, and consequently the impact this can have on the business. A 'drag along' clause allows a large shareholder (or group of shareholders) to 'drag' the other shareholders into a joint sale of the entire venture. >^L=_PQP Bc"g'5f->h| In this sense the aim is to protect minority shareholders, who may use them to: In India the legal validation of such clauses can be inferred from the provisions of the Indian Contract Act and Section 111A, states that the shares in the public company must freely be transferable thereby implying that the shares can be transferred to freely transferred from one party to other be it the fellow shareholder (right to first refusal ) or to any third party by various shareholders (Drag Along), also Section 58of Companies Act, 2013 follows the same line of reasoning but also additionally came with the clause that states:-, https://taxguru.in/company-law/drag-along-tag-along-provisions-shareholders-agreement-enforceability.html, https://www.wallstreetmojo.com/tag-along-rights/, https://linkilaw.com/company-law/tag-along-drag-along-rights-explained/, https://www.upcounsel.com/tag-along-rights, https://www.investopedia.com/terms/t/tagalongrights.asp, Weekly Competition Week 1 December 2019, Weekly Competition Week 2 December 2019, Weekly Competition Week 3 December 2019, Weekly Competition Week 4 December 2019, Weekly Competition Week 1 November 2019, Weekly Competition Week 2 November 2019, Weekly Competition Week 3 November 2019, Weekly Competition Week 4 November 2019, Weekly Competition Week 2 October 2019, Weekly Competition Week 3 October 2019, Weekly Competition Week 4 October 2019, Weekly Competition Week 3 September 2019, Weekly Competition Week 4 September 2019, The effectiveness of the International Criminal Court: an analytical study, An analysis of decentralization of the judiciary in India, Commodity arbitration in the international setup. `F(:eB3o3 This works mainly to safeguard minority shareholder interests. Tag along rights is incorporated along with other contractual rights such as Right to the first refusal, Drag Along Rights, Piggyback Rights, etc, it is necessary to draft the Tag-along Clause in consonance with other contractual rights, the order of these right shall also be kept in mind as they all are read in tandem with each other. hbspt.cta._relativeUrls=true;hbspt.cta.load(2568027, '7d7e0f4e-6a69-42d8-8806-f7ca37088cfb', {"useNewLoader":"true","region":"na1"}); Greg has supported clients through $3.5b+ in transactions in the construction and technology sectors. For example, the shareholder might act in bad faith, by setting a low price for the shares with the buyer, in order to defraud the other shareholders and share the benefits with the buyer or might sell at a low and unfair price to an affiliate or agent. Liability limited by a scheme approved under Professional Standards Legislation. It is pertinent to mention that Tag-Along Right is invoked only when the majority shareholder is selling his/her share to the extent that will bring change in control of the company if the Majority shareholder is selling 20-30 % of his/her share that will not bring any material change in control than the majority shareholder is not required to follow the protocol embedded under the Tag-Along Clause. This type of clause in a SHA is there solely to protect the majority shareholder (s) who generally hold more than 51% of the shares in the company. Tag along, drag along and similar clauses in a shareholders agreement, to ensure minor shareholders are not left behind in the event a major shareholder decides to exit the venture. "Piggyback") right is or what it means to be subject to a "Drag-Along" (a.k.a. Anti-dilution clause. Clauses in a Shareholders' Agreement Obligations of Shareholders: All those party to the agreement will have their roles and obligations well-defined. The main benefit of arbitration is that the dispute can be kept outside of the public eye. 7 things an investor should look for in a shareholders agreement, Tag along rights in shareholders agreements. In India the legal validation of such clauses can be inferred from the provisions of the Indian Contract Act and Section 111Aof Companies Act, 1956 states that the shares in the public company must freely be transferable thereby implying that the shares can be transferred to freely transferred from one party to other be it the fellow shareholder (right to first refusal ) or to any third party by various shareholders (Drag Along), also Section 58of Companies Act, 2013 follows the same line of reasoning but also additionally came with the clause that states:-. Shareholder AgreementsAs a material inducement to Washington Federal to enter into this Agreement, and simultaneously with the execution of this . . sRpEjF?$h It is designed to protect the position of the minority shareholder where the majority shareholder decides to sell a defined percentage of shares in the company. While they have advantages and disadvantages, these clauses primarily benefit majority shareholders at the expense of minority shareholders. Lets assume that all the existing shareholders have exercised their right to the first refusal, which grants the shareholder the right to sell it to some third party. This type of clause would typically result in shareholders selling some of their shares, but none of them being able to sell all of them. In the event, the potential buyer refuses to purchase the additional tagged along share, the shares of majority shareholders and the additional tagged along shares of minority shareholders will be reduced so that the said sale can be effectuated. Another similarity with drag along clause is that the dissenting or minority shareholders can only be forced to sell their shares on the same price and on the same conditions as the majority shareholders. When a majority shareholder sells their shares, a tag along right will entitle the minority shareholder to participate in the sale at the same time for the same price for the shares. A shareholder with a tag-along right is entitled to buy another shareholder's shares on the same terms and conditions as all other shareholders. The law cannot be absolutely comprehensive, the legislature cannot envisage every possible way to protect the rights of every shareholder or any other aspect of companies/organizations for the purpose of providing equitable Regulations, Therefore, to remedy such lacunae led to the creation of certain rights through contracts to protect the interest of every stakeholder of an organization, one of the most salient right to protect the interest of the minority shareholders in a company is Tag-Along Right. Tag Along: This clause provides that if a shareholder offers to sell a specified percentage of the shares in the company to a third party, such shareholder must procure that the third party makes the same pro rata offer to acquire the shares of the remaining Shareholders. (42F Tag along clause: Also referred to as piggyback rights, a tag along . Heads of Agreement: What are they and are they binding? Under Section 129 of the ISA, a dissenting shareholder may make an application to the court within the stipulated timeframe to stop the sale of his shares and the court is left to decide whether or not the shares of the shareholder will be forcefully acquired. A drag along clause is a provision that can be found in a shareholders agreement. The only way to get it right is to give careful consideration to the various options (some of which may not appear above), and to tailor a solution to suit your circumstances. %PDF-1.6 % Turtons is a commercial law firm in Sydney with specialist expertise in the construction and technology sectors. Q)XY[-Q8=}"#>3!or\0l&fP{EnVYS2WZ_^ See you there. The Tag-Along Clause is generally included in Shareholders' Agreements to protect the position of the minority shareholders. There can be variants of the above clauses, some of which address the situation where some shareholders (but not all) wish to 'tag along'. The dissenting shareholders are the minority shareholder because they own not more than 10% of the shares of the transferor company. Tag-along rights are a form of contract clause and therefore not enshrined in statutes. One difference between Section 129 and drag-along clause is that, under section 129, it is the buyer that is forcing the minority shareholders to sell their shares. A come-along clause, also known as a drag-along clause, is a common provision included in shareholder agreements, particularly in the agreements of growing companies seeking venture capital. There are a number of reasons why should be wary of a, If you would like to know more about what is usually covered by a shareholders agreement, read our separate post. 6 Ck-kl#+eB2z:BOG*,9J63#.8 0~Byn Hence, where nine-tenths (90%) of the shareholders have agreed to a sale, the remaining shareholders will be forced or dragged along in the sale. Although these types of provision can be effective in resolving impasses quickly, they also have the potential to produce unfair results - particularly where there is a material disparity between the parties' financial positions. Disputes between shareholders can often occur when one group wishes to sell the business and the other group does not. endstream endobj 215 0 obj <>stream | Powered by. If you are an investor or minority shareholder, there are two reasons why you might want tag along rights: If you are an investor, there are other things you should look for in a shareholders agreement, as we explain here. Heads of Agreement: What are they and are they binding? The difference between an advisory board and a board of directors. It is common when a company works in a high risk-bearing sector where results expected are high. This section appears to be akin with a drag along clause. Shareholders have to be cautious in drafting these clauses due to legal issues surrounding them. [q"U95OAqZ The agreement allowed the three original shareholders to sign transfer forms on behalf of the other shareholders if they refused to do so. 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. Section 129 (1) & (2) of ISA provides: (1) Where a scheme or contract (not being a take-over bid under this part involving the transfer of shares or any class of shares in a company (in this section referred to as the transferor company) to another company, whether a company within the meaning of this Act or not (in this section referred to as the transferee company) has, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for the transferee company or its subsidiary), the transferee company may at any time within two months after the expiration of the said four months give notice in the prescribed manner to an dissenting shareholder that it desires to acquire his shares. He claimed that a share-for-share exchange was not a sale, and the drag-along provisions only applied in the event of a sale. These provisions are known as 'pre-emptive rights'. When the promoters or Majority shareholders transfer their shares to incoming investors, the existing minority shareholders can tag along. Liability limited by a scheme approved under Professional Standards Legislation. Having Tag-Along Clause in the shareholder agreement precludes such unwarranted influence by the majority shareholder thereby balancing the equation of power and leverage among the shareholders. However, if the shareholders concluded a shareholder agreement with a provision regarding Tag-Along-Rights, the minority shareholder has the right to participate in the sale of the shares, if he or she is interested in. A mechanism that works well for one company may be completely inappropriate for another, taking into account differences between the relationships, businesses, financial resources of the parties and other relevant considerations. Drag-Along and Tag-Along Clause in a Shareholders Agreement, Posts on Social Network Websites and Data Protection, http://www.lawyr.it/index.php/articles/domestic-focus/1265-getting-along-shareholders-rights-drag-along-and-tag-along-clauses, https://www.icaew.com/library/subject-gateways/law/legal-alert/2018-09/case-law-court-gives-guidance-on-interpretation-of-drag-along-rights, The Proceeds of Crime (Recovery and Management) Act 2022: A Summary, An Overview of CBNs Digital Financial Service Awareness Rules. (Remark: The information of these additional tagged along shares will be transpired to the third party (potential buyers) as he/she will be required to purchase these tagged shares also in addition to purchasing the shares of the majority shareholder). Consequently, when these clauses are used, they are usually tailored to suit the specific circumstances and contain checks and balances to ensure they cannot operate unfairly. iO(265GGN$wn87B'68Sza-rBDEyg~x s6k8J@wg--g^3u+{{39gdaHAqnnN'Y(Q%XX]b%X'U7P;r `'5D`:/!.D They can be an important protection for minority shareholders. Copyright 2016, All Rights Reserved. Alternatively, the buyer may want to acquire 100% of the company. In simple terms, a Drag Along Right allows majority shareholders to force the minority shareholders to join in on a sale of their shares. For example, the shareholders could elect that if 2 out 3 owners agree to sell the business then the 'drag-along . (2) The transferee company shall within one month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement) give notice of that fact in the prescribed manner to the holder of the remaining shares or of the remaining shares of that class, as the case may be, who have not assented to the scheme or contract. This shareholders' agreement video tutorial is about control rights and the drag along/tag along. By agreeing on a Bring-Along Clause, the minority shareholders are obliged to offer their shares to the investor. [3], Cunningham v Resourceful Land Limited[4] In this case, shareholders set up two companies. If you are investor, it is important to ensure that key shareholders remain committed and motivated. 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 tag along clause requires the minor shareholder to be allowed to join in on a sale. In some situations, a buyer would want to acquire the entire share capital of a company and gain complete control.