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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:

  1. 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.
  2. 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.
  3. Avoiding Obstacles: They prevent minority shareholders from blocking a sale or creating obstacles that could complicate or reduce the potential benefits of a sale.
  4. 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.
  5. 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.