Legal Lingo: What are 'drag-along' and 'tag-along' rights?

Viewpoints
June 2, 2023
1 minutes

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts leading to an often impenetrable wall of jargon for students and trainees. Next up in our Legal Lingo series, which we've introduced to help break down this jargon, is an explanation of what 'drag-along' and 'tag-along' rights mean.

In the event of a sale, usually of a controlling interest, by a private equity investor or by a certain majority of the existing shareholders to a purchaser:

  • “Drag-along rights” allow the selling majority shareholders to procure an exit by forcing the remaining minority shareholders to sell their shares on the same terms as have been negotiated by the majority shareholders for the sale of their own shares; whereas
  • “Tag-along rights” allow the minority shareholders to require the majority shareholders to procure an offer for the sale of the minority shareholders’ own shares on the same terms.

The advantage of a drag-along provision is that it gives the majority shareholders the right to require that the minority shareholders also sell their shares, thereby allowing a purchaser to acquire 100% of the share capital of the company, rather than being left with a (potentially uncooperative or even hostile) minority shareholder group.

The tag-along provision is the quid-pro-quo of the majority shareholders demanding a drag-along right and is designed to give minority shareholders the right to sell all or a portion of their shares during a sale process. Without it, minority shareholders have limited exit rights due to their lack of controlling interest in the company.

Both of these are contractual mechanisms and are usually set out in the articles of association or shareholders’ agreement relating to the company.