Drag-along rights are provisions found in shareholders’ agreements that enable a majority shareholder to force minority shareholders to join in the sale of a company. The majority owner doing the “dragging” must give the minority shareholders the same price, terms, and conditions as any other seller.
Here’s why drag-along rights are significant:
- Protecting Majority Shareholders: They protect the interests of majority shareholders by allowing them to sell the entire company rather than just their share, which can be more appealing to potential buyers.
- Facilitating Sales: Drag-along rights can make the sale of a company more straightforward by ensuring that all shares are available for purchase, which can be particularly attractive to potential buyers who are looking to acquire 100% of a company.
- Avoiding Obstacles: They prevent minority shareholders from blocking a sale or creating obstacles that could complicate or reduce the potential benefits of a sale.
- Ensuring Fairness: By stipulating that minority shareholders receive the same terms as the majority shareholders, drag-along rights ensure that all shareholders are treated equally in the sale process.
- Beneficial for Minority Shareholders: They can also be advantageous for minority shareholders by providing an exit strategy that they might not otherwise have, as finding a buyer for a minority interest can be difficult.
Drag-along rights are often paired with tag-along rights, which allow minority shareholders to join a sale initiated by majority shareholders, ensuring they can benefit from a sale on equal terms. These rights are key considerations in equity deals and are critical to understand for anyone involved in a startup or an investment in privately held companies.