In this article, we consider a common clause and highlight its use.

Where might you find these clauses?

Drag-along and Tag-along clauses might be included in these key documents:

• Articles of Association
• Shareholders’ Agreements
• Investor Agreements

Articles of Association are filed at Companies House, and so access is open to anyone who wishes to take a look.

Shareholders’ Agreements and Investor Agreements are private agreements (so access is not for the public) and made between shareholders of a company. These agreements usually “sit on top” of the Articles, meaning they run alongside rather than replace the Articles.

What do these clauses do, and how can they help a company?

Drag-along and Tag-along provisions can be included in a company’s governing documents in order to balance the interests of both majority and minority shareholders during a company sale. Drag-along clauses allow majority shareholders to compel minority shareholders to sell their shares when a buyer seeks full ownership of the company. Conversely, Tag-along clauses give minority shareholders the right to ‘tag-along’ and participate in a sale initiated by the majority, allowing them to sell on the same terms.

What are Drag-along rights?

If some shareholders want to sell their shares to a third party and the sale is dependent on this being a sale of the entire issued share capital of the company,  having a Drag‑along clause in place gives some of the shareholders (usually a given percentage or holders of a certain class of shares) the right  to compel the other shareholders (usually minority shareholders) to join in the sale of the company on the same terms.

This is really useful in a company with some minority shareholders whose reluctance to sell shares could be a hindrance to the other shareholders.

Example:

The company ‘ABC Limited’ has 3 shareholders: Amy, Ben, and Chloe. Their respective shareholdings are as follows:

• Amy: 80%
• Ben: 15%
• Chloe: 5%

A buyer is interested in purchasing all the shares of ABC Limited and offers an attractive price for the shares to the shareholders. Amy and Ben want to sell, but Chloe does not. Even though Chloe owns just 5% of the shares, her refusal to sell means that Amy and Ben will also lose out on this sale.

However, with a Drag-along clause in place, Amy and Ben would be able to compel Chloe to sell her shares to the buyer on the same terms, allowing the deal to proceed fairly for all shareholders.

The clause can also include an agency clause so that a director of the company can sign documents relating to the sale of the shares if the seller under the Drag-along clause doesn’t comply.

What are Tag-along rights?

Tag-along rights benefit minority shareholders. When the majority decide to sell their stake to a third party, the minority are entitled to ‘tag along’ and sell under the same terms.

Example:

Using the example of ABC Limited again, Amy finds a buyer willing to purchase her 80% shareholding. The buyer plans to take control of ABC Limited but has no obligation to buy shares from Ben or Chloe.

Without Tag-along rights, Ben and Chloe could be left behind, without the opportunity to sell their shares for the price offered to Amy for her majority share, and with a new and unknown majority shareholder influencing company decisions.

However, with Tag-along provisions in place, Ben and Chloe have the right to sell their shares on the same favourable terms as Amy. This protects minority shareholders from being stranded and ensures they can exit fairly alongside the majority.

Summary of Drag-along Benefits:

• Streamlines negotiation by removing potential resistance minority shareholders.

Summary of Tag-along Benefits:

• Provides a fair exit route for minority shareholders that don’t wish to remain attached to the company with a new/unknown majority shareholder.

• Ensures that minority shareholders are entitled to the same price and conditions as the majority when the shares are sold.

How can Bhayani Law Help?

Considering putting a Shareholders’ Agreement in place, but unsure where to begin?

The Company & Commercial team at Bhayani Law is here to guide you. We’ll take the time to understand your business structure and objectives, helping you put the right protections in place.

Get in touch with our experts on 0333 888 1360 or email [email protected]. We’re here to provide clear, practical advice tailored to your needs.