Tag-along rights, also known as “co-sale rights,” are contractual obligations used to protect minority shareholders in a company. These rights allow minority holders to join in when a majority shareholder sells their stake in the company, ensuring that the minority holders receive the same terms and conditions as the majority shareholder.
The key points of tag-along rights include:
- Equal Treatment: They ensure that if a majority shareholder sells their stake, minority shareholders have the right to join the transaction and sell their minority stake on the same terms and conditions as the majority shareholder.
- Minority Shareholder Protection: This right protects minority shareholders from being left behind in a situation where the majority shareholder could sell their controlling stake without securing any benefits for the minority shareholders.
- Marketability of Shares: Tag-along rights can increase the marketability of minority shares by ensuring that minority shareholders can exit the company alongside the majority shareholder, who is likely to negotiate a sale more effectively.
- Negotiation Leverage: Minority shareholders can sometimes leverage tag-along rights during negotiations, particularly if their agreement to sell is necessary to complete the deal.
- Potential to Maximize Returns: In the event of a buyout or sale to a third party that is willing to pay a premium for control, tag-along rights can help minority shareholders receive a higher price for their shares than they might get on their own.
While tag-along rights provide protection and potential benefits to minority shareholders, they also need to be carefully structured within shareholders’ agreements to ensure clarity and enforceability. These rights are crucial for maintaining equity and fairness during the transfer of ownership, especially in private companies and startups where share liquidity can be an issue.