A drag along tag along shareholder agreement is an essential part of structuring a company’s ownership and protecting shareholders’ interests. These provisions help define the rights and obligations of both majority and minority shareholders, especially when shares are sold or transferred.
Drag along and tag along rights ensure that share sales proceed smoothly while maintaining fairness for all parties. In this guide, we explain what these provisions are, why they are used, and how they help balance the interests of shareholders in a company.
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What is a Shareholder Agreement?
A shareholder agreement is a private contract between a company and its shareholders, and among the shareholders themselves. The agreement clearly defines each shareholder’s rights, responsibilities, obligations, and liabilities.
These agreements include various provisions that guide the company’s management and address potential contingencies. For example, drag along and tag along provisions often appear in shareholder agreements. They balance the rights of majority and minority shareholders and play a key role when selling a company or its shares to a third party.
What are Drag Along Rights?
A drag along provision lets majority shareholders require minority shareholders to sell their shares, joining the majority in a sale of company shares. This typically happens during a takeover offer.
For instance, if majority shareholders hold more than 50% of a company, they may decide to sell their shares. In this case, they can ‘drag along’ minority shareholders, compelling them to sell as well. Consequently, the buyer purchases the entire company, which is often more attractive.
Why Are Drag Along Provisions Used?
Drag along provisions allow majority shareholders to sell the entire company, which minority shareholders might otherwise block.
Key reasons for drag along provisions include:
- A potential buyer may hesitate to purchase a majority interest if minority shareholders remain involved without prior dealings.
- Selling the company as a whole can attract more favourable offers.
- Without drag along rights, uncooperative minority shareholders could prevent a third-party acquisition, even if the sale benefits other shareholders.
What is a Tag Along Provision?
Tag along provisions allow minority shareholders to join a sale initiated by majority shareholders. As a result, minority shareholders can sell their shares on the same terms as the majority.
Why Are Tag Along Provisions Used?
These provisions protect minority shareholders so they are not left behind if a majority shareholder sells. Specifically, tag along rights allow minority shareholders to:
- Participate in the sale transaction.
- Receive the same sale terms as the majority shareholders.
- Avoid being disadvantaged during the sale process.
Are Drag Along Rights Oppressive?
Drag along rights might seem oppressive initially; however, without them, a minority shareholder could block a beneficial sale. Typically, drag along provisions require majority shareholders to sell minority shares on the same terms and conditions.
The Corporations Act 2001 (Cth) protects minority shareholders from oppressive actions by majority shareholders. In particular, minority shareholders can seek remedies if company affairs are conducted in a way that is:
- Contrary to the interests of all shareholders, or
- Oppressive, unfairly prejudicial, or discriminatory to minority shareholders.
Therefore, the best way to prevent drag along rights from being seen as oppressive or unfair is to draft them carefully in the shareholder agreement. Accordingly, we strongly recommend seeking legal advice when preparing or signing a shareholder agreement.
Drag Along & Tag Along Shareholder Agreement: Key Takeaways
Drag along and tag along provisions are crucial when preparing a shareholder agreement. They ensure a fair balance of rights between majority and minority shareholders.
This article provides general information and does not constitute legal advice.
For more information or legal assistance, call 08 9336 6300 or email [email protected].