Although drag-along rights are more likely to protect the controlling shareholder(s), minority shareholders can often benefit from them as well. iO(265GGN$wn87B'68Sza-rBDEyg~x s6k8J@wg--g^3u+{{39gdaHAqnnN'Y(Q%XX]b%X'U7P;r `'5D`:/!.D Usually, in a startup, the promoters are the majority shareholders, in order to attract various investors having the policy of Tag-Along Rights helps, and since the policy off tag-along right is adopted in the Article of Association or Shareholders, the promoters can sell their shares at an increased price to the investors as they are providing a safety net and sense of security to the minority shareholders. Tag-Along right is also called co-sale rights, a Tag-Along Clause can be found in a companys 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 shareholders can exercise its right to tag along. The tag along clause requires the minor shareholder to be allowed to join in on a sale. 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. The Drag-Along clause gives majority Shareholders (pre-determined percentage of Shareholders) who wish to sell their shares to an unrelated third-party, the right to force the remaining shareholders to sell their shares on the same terms. Right of drag or "drag along". This works mainly to safeguard minority shareholder interests. This section appears to be akin with a drag along clause. What's the difference between tag along and drag along rights? 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. It is very common in start-ups and amongst . . You can click on this link and join: https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA. Co-sale/tag-along clauses allow shareholders to sell their shares along with a sale by another shareholder. The basic idea behind this restriction is to ensure that the existing shareholders is not forced to accept an unwanted new shareholder. 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. The most common clause that I have found in Term Sheets is the clause that deals with the Tag-along and the Drag-along rights of the investor. 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. endstream endobj 215 0 obj <>stream Whereas a 'tag along' clause provides protection to small investors, a 'drag along' provision protects the interests of the major shareholder(s). PCRD's shares to OFPL's shares must be maintained at 3:1. 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. However, there is quite a bit of confusion and seldom does the parties to the agreements understand the nuances attached to this clause. It is noteworthy that Section 129 sets a very high threshold and minority shareholders can be dragged along under that section only when 90% of shareholders of the transferor company assent to the sale. IRS Circular 230 Disclosure: Pursuant to Internal Revenue Service rules of practice, any tax advice set forth in this form is not intended or written to be used, and cannot be used, for the purpose of (a . 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. 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. Occasionally a 'tag along' right is included (i.e. >^L=_PQP Bc"g'5f->h| (4) If a shareholder gives notice under subsection (3) of this section with respect to any shares, the transferee company shall be entitled and bound to acquire those shares on the terms on which under the scheme or contract the shares of the approving shareholders were transferred to it, or on such other terms as may be agreed on as the court hearing the application of either the transferee company or the shareholder thinks fit.. There are a number of reasons why should be wary of a shareholders agreement template. The dissenting shareholders are the minority shareholder because they own not more than 10% of the shares of the transferor company. A drag along clause is a provision that can be found in a shareholders agreement. 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. A tag along right gives the right to minority shareholders to 'tag along' in a sale by a majority shareholder to a third party. TA\iAir 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. The most common are as follows. The composition of the board may also be stated here. In some situations, a buyer would want to acquire the entire share capital of a company and gain complete control. 3:zAofT37B"6y2% S}/=/A[Mc'g42ng+ 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. A shareholders agreement is a binding document that supplements the Constitution of a company. Although most (informed) investors will insist on tag along provisions, and you may have to agree to them, many investors will also be willing to grant concessions. 5. If you are investor, it is important to ensure that key shareholders remain committed and motivated. 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. A, Tag along clauses are most frequently found in shareholders' agreements concerning joint ventures or management buy-outs. Liability limited by a scheme approved under Professional Standards Legislation. The type of majority required to invoke a drag along depends on the agreed threshold. The tag-along rights protect the minority's interest in such events. This shareholders' agreement video tutorial is about control rights and the drag along/tag along. This Tag Along Clause is for use in Shareholders' Agreements where one of the parties is a minority shareholder. clause in a shareholders agreement a shareholder who leaves may be able to sell his shares to anyone, leaving the remaining shareholder(s) running a company with someone he does know, or the other . Whereas a 'tag along' clause provides protection to small investors, a 'drag along' provision protects the interests of the major shareholder(s). Many shareholders invest in a company on the basis of the existing majority shareholder because of their prestigious nature, their corporate practice, policies or principles, their propagated representations, and warranties, etc or due to a better understanding and coordination inter se, however, the idea of working with the new majority shareholder might not be welcomed by the minority shareholder, hence, tag along right provide the convenience to exit the organization accordingly. Anti-dilution clause. This article has been written by Prateek Giri Goswami, pursuing a, Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution. 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. He assists medium sized businesses grow and realise capital value through strategic legal initiatives and business-changing transactions. The basic idea is to ensure that the existing shareholders cannot be forced to accept an unwanted new shareholder. The 'tag-along' clause if often used in conjunction with the 'right of first refusal'. 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. By virtue of the tag-along clause, the minority shareholders need not go through such hardship, since they can just get tagged along with the deal cracked by the majority shareholders for the sale of shares. %PDF-1.6 % Drag-Along and Tag-Along Rights. The expression "drag along" comes from the idea that the minority shareholders are being forced against their will to sell their shares. Where the majority shareholder decides to sell his shares, this clause gives the minority shareholders the right to sell their shares to the same buyer for the same price and on the same terms and conditions. Amongst the many important clauses in a shareholders agreement, the 'Come Along' clause and the 'Tag Along' clause are discussed below. DYyoAg/rhpw,A Should the key shareholder be required to offer their shares for sale to the existing shareholders before offering them to a potential external investor? z4 )R2e%Zft_kbPItp7KMJ+ uVt>XuN5y>Q*$ZpS. The literal meaning Tag-Along is tagalong(after someone) andtagalong(behind someone) to follow along after someone; to go along with someone, in the same context, Tag-Along right can be defined as a right provided to minority shareholders in a company to go along with a majority shareholder in the event the majority shareholder is selling his/her shares to some third party, if a majority shareholder is selling his/her shares via an agreement to some third party, then the minority shareholder also get the option to sell their share to the said third party via the same agreement and its terms and condition. Drag-along clause protects the interest of majority shareholders. These provisions will allow a party to require the sale or winding up of the entire venture. This article has been written by Prateek Giri Goswami, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolutionfrom LawSikho. J~` ;k6t"a$kkUmfCTI*EuYX`PgH#{Ww2e4'%`G3A/ >2l2$y\T@s#J^pM43YCZ>sg%iS|!rhrhQdwgryRrAJc|"Q71 undertake strategic initiatives, such as raising capital, buying businesses, implementing employee share schemes, designing and implementing exit strategies and selling businesses. At first glance, these clauses appear bilateral, that is between majority shareholders and minority shareholders. Other times the agreement will allow the parties to make counter offers so that the shareholder(s) willing to pay the highest price will end up buying out the other(s). Tag along clause: Also referred to as piggyback rights, a tag along . A Shareholder Agreement, Shareholder Agreement, also known as a stockholder agreement or SPA, is a contract between the stock owners of a corporation that addresses rights and responsibilities, ownership and valuation, finances, assets, capital, dividend payouts, and more. One of the drawbacks of arbitration is the time and cost involved, and consequently the impact this can have on the business. 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. If you are a founder or other key shareholder who may be subject to a tag along provisions, it is important to keep this in mind. 7 things an investor should look for in a shareholders agreement. 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