DRAG AND TAG ALONG

ByShelley E.Advocate

Altacit GlobalEmail: info@altacit.com Website: www.altacit.com

INTRODUCTION

• Shareholder agreements specify the rights and duties of shareholders.

• Shareholder agreements are used mostly by companies with at least some shareholders actively involved in the management of the company.

• Prominent examples of shareholder agreements are:– the joint venture– venture capital contracts that govern joint ventures

and venture capital-backed firms

General clauses in Shareholder agreements

• Shareholder agreements generally grant the parties the following rights:

– The option to put their stakes to their partners– To call their partners’ stakes– Tag along rights– Drag along rights– Demand rights– Piggy back rights– Catch up clauses

DRAG AND TAG ALONG RIGHTS

• Drag and Tag along rights are clauses included in their share holder’s agreement, standard term sheets and most often in investment documents.

• A drag-along right provides an up-front agreement for all shareholders to participate in a sale of shares to a third party.

• Tag-along rights protect the interest of minor shareholders. In the case of the majority shareholders selling out, the tag-along rights allow the minority shareholder to jump on the back of the buy-out.

DRAG ALONG

• Drag Along Right, gives the majority shareholders of the company the right to drag the minority shareholders (generally the promoters) with them in case the majority shareholders (generally the investor) have decided to sell their stake to a third-party.

Cntd…

• If the investor has the Drag Along Right and he wants to sell his stake to a third-party then he can drag the promoters of the company with him to sell their stakes on the same terms and conditions that he is getting from the buyer.

• Drag Along Right generally lies with the majority stakeholders so that the minority shareholders are not able to create issues in the selling process.

WHEN DOES DRAG ALONG GET TRIGGERED?

• Generally, this clause gets triggered when investor

has found a buyer who is interested in buying

100% stake in the company and is not interested

in buying the investor’s stake alone.

• In such case, Drag Along right becomes important

for the investor as they can force the promoters

and other investors to sell their stakes as well.

TAG ALONG

• Tag Along is the reverse concept of Drag Along. It is the A contractual obligation used to protect a minority shareholder.

• Tag Along Right gives minority shareholders of the company the right to be tagged on the same terms and conditions with the majority shareholders in case majority shareholders are selling their stake to a third party.

Cntd…

• If the majority shareholders of the company have decided to sell their stake then the minority shareholders can use this right to get tagged with the majority shareholders and sell their stake on the same terms and conditions as well.

• Tag along rights are also referred to as "co-sale rights".

WHEN DOES TAG ALONG GET TRIGGERED?

• Tag Along right becomes important for minority shareholders so that

– they can sell their stake along with the majority shareholders

– they will not have to be forced to work with the new partner without their willingness.

ENFORCEABILITY

• These rights and obligations are legally recognized when the investee company is a private company.

• Drag-along and Tag-along rights generally terminate on a public offering.

• However, it is important to test their enforceability in case of public companies owing to the direction that the jurisprudence on the subject has taken in India.

SAMPLE DRAG- ALONG CLAUSE

• “Drag-along” right: In the event that some of the Shareholders accept an offer from an Outsider to purchase a minimum of 75% of the common shares, then all of the Shareholders (including any Shareholder who did not accept the Outsider’s offer to purchase) shall be required to sell all of their common shares to the Outsider on the same terms and conditions, if the Outsider desires to purchase such Shares, and only if the purchase price is at least equal to the Valuation Schedule attached as Schedule B to this agreement.

SAMPLE TAG- ALONG CLAUSE

• “Tag-along” right: In the event that each member of a group of Shareholders, which group holds a majority of the common shares, serves a Selling Notice in connection with the same Outside Offer and if after the Outside Offer is served upon the Offerees, one or more of the Offerees decide that s/he or they wish to sell their Shares to the Outsider on the same terms and conditions as contained in the Outside Offer, then the group shall not be entitled to sell, transfer or otherwise dispose of the Offered Shares unless the Outsider purchases at the same time and on the same terms and conditions all of the Shares of the Offerees who so desire to sell their Shares.

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