A drag-along right enables a shareholder with a majority stake in a company to coerce a shareholder with a minority stake into participating in the sale of the company. It is possible for drag-along rights to be stipulated and implemented within the terms of a share class offering, as well as within the agreement governing a company acquisition. The majority owner is responsible for providing the minority shareholder with the same terms and conditions as those offered to any other buyer.
A company's majority shareholder, who owns more than 51% of the company's shares, is obligated to make the same purchase price offer to the company's minority shareholders. With the inclusion of a drag along clause, the majority shareholder will have the ability to coerce the remaining minority shareholders into selling their shares to a third party by threatening to 'drag' them along with them.
When a majority shareholder makes the decision to sell their shares, a taggart clause is activated to prevent the minority shareholders from being left out in the cold. In the absence of tag along rights, minority shareholders run the risk of holding shares that cannot be sold or that have lost value. Because of this, they run the risk of being forced to sell their shares at a price that is either significantly lower than the current market price or has no relation to the actual value of the company.
The process of selling off one fifty one to one hundred percent of ownership in a company to different potential buyers is referred to as drag-along. The rights known as tag-along, which protect minority interests, are not to be confused with the practice known as drag-along. In order for a majority shareholder to exercise their drag-along right, they are required to give advance notice to the shareholders in the minority.
Transactions such as initial public offerings, mergers, acquisitions, and takeovers can be quite complicated. Drag-along rights enable a company to rid itself of its existing minority owners and sell all of its securities to a prospective purchaser in one transaction. The distinction between majority and minority ownership may be affected by the various share classes that are available.
A shareholder agreement is a legal contract that outlines each shareholder in a company's rights and obligations. It details the stockholders' obligations, rights, and tagging along privileges.
The stakeholders in a business who own a majority of the company stock are referred to as majority shareholders. In most cases, their ownership exceeds 50% of the company's share ownership when refering to drag along rights.
There may be one or more minor shareholders, and overall ownership typically isn't at least 51% of the shares needed for a firm to be publicly traded.
The price at which the seller consents to sell the buyer the company or its assets is referred to as the offer price. A deal, for instance, can be a company merger or full company share buyout. If the majority owners can find a buyer prepared to pay a price that is acceptable to them and buy 100% of the business.
The purpose of drag along rights is to furnish a majority shareholder with liquidity, flexibility, and an exit route that is not difficult to navigate. It is extremely rare for potential buyers of a target company to agree to let a minority shareholder keep their stake in the company because the majority of buyers want to have complete control over the company.
It is possible to establish drag-along rights either through the process of raising capital or through the negotiations of a merger or acquisition. Because of this provision, there will never again be an instance in which a minority shareholder has the ability to sabotage the process of selling a company in any way. Additionally, it does not leave any shares of the acquired company in the possession of the shareholders who had them before.
Minority shareholders are protected from the potentially detrimental effects of share dilution through the use of drag-along rights. When a provision of this kind is present, it stipulates that the price, terms, and conditions associated with the sale of shares must be consistent across the board. Small equity holders have the opportunity to realise favourable sales terms that might not be attainable under other circumstances.
New drag-along rights that force minority stakeholders to complete the merger with the larger unit may be incorporated into the merger agreement. As a result, both the majority and minority stakeholders agree to the same price for the transaction as well as equal and uniform terms and conditions.
In many company acquisitions, the majority company stock owners use and action their drag along rights to drag minority shareholders to their positions. With drag along right deals, the minority share owners are usually given the same benefits as majority stock owners.
The purpose of the drag-along rights is to protect the rights of majority shareholders. Additionally, minority stakeholders find it valuable. Drag along rights contribute to the beneficial and uniform terms and offer price of the agreement. The rights are implemented during the investment talks between the minority shareholder and the dominant stakeholder. In the event that the drag along rights are actioned, the governing rights and non-controlling interests of the stakeholders holding a minority investment are rendered null and void.
After the transaction is finalized, it is possible that the minority stakeholders would be left in possession of illiquid assets. There is a possibility that the minority stakeholders will not accept the transaction that is being pursued by the majority of stakeholders, or they may refuse to comply with its terms. When acting on behalf of shareholders who possess minority ownership, the stockholders who own the majority of the company's shares are responsible for ensuring compliance with statutory requirements.
When a company files for an initial public offering (IPO), the drag-along rights often expire at that time. The minority stakeholders have the ability to carry out a phase of back-out in which the drag-along rights are put on hold. If the minority stakeholders do not agree to support the sale, the majority of the stakeholders will be required to search for proxy rights that cannot be revoked.
Ashly Chole - Senior Finance & Technology Editor