How common are drag-along rights?

In most cases, the controlling majority, or a minimum of 51 percent are allowed to hold a vote to trigger a drag-along the sale. However, 66 percent may be the ideal rate depending on the company. Voters are usually preferred stockholders. Common stockholders might also be included, but this is rarer.

Who benefits from drag-along rights?

In the event of a sale of a controlling interest by the shareholder(s) holding a specified majority of shares, a drag-along right enables the selling majority shareholder to procure an exit by forcing the remaining minority shareholders to similarly sell their shares to a bona fide third party purchaser on broadly the ...

Are drag-along rights enforceable?

Drag-along rights are enforceable if the drag-along provision is drafted properly and contained within a valid and enforceable contract, and if the transaction is executed according to the terms of the provision.

Where are drag-along rights?

Drag-along rights can be instituted through capital fundraising or during merger and acquisition negotiations. If, for example, a technology startup opens a Series A investment round, it does so to sell ownership of the company to a venture capital firm in return for capital infusion.

Can you have both drag-along and tag-along rights?

While the decision to drag or tag can vary from company to company, some basic principles apply to both types of rights. For example, co-owners generally need to give notice before dragging or tagging. If a majority owner doesn't give notice of the sale to his co-owners, then his dragging or tagging attempt could fail.

Tag-Along and Drag-Along Rights

Can a minority shareholder have drag-along rights?

Tag along rights are also known as 'co-sale rights' are simply those rights which mostly benefit the minority shareholders. When the promoters or Majority shareholders transfer their shares to incoming investors, the existing minority shareholders can tag along.

Why are drag-along rights important?

Drag along rights are designed to protect the majority shareholder and as they enable the sale of the whole company by buying out minority shareholders. Your investors who are likely to be the majority shareholders as your startup progresses will consider these rights to be important.

How do you enforce drag along rights?

The first remedy that majority owners can take is to request minority owners to grant an irrevocable proxy. If given, this allows majority owners to act on behalf of minority owners in any vote or action required to effect the sale. It includes signing documents on behalf of the minority owners.

Can a minority shareholder sell their shares?

Minority shareholders can still sell their stock in the future to make a profit if the investment is healthy, and can still reap the dividends that the business awards. These benefits do not go away because of the status of the shareholder.

Is co sale right the same as a tag along right?

Tag-along rights also referred to as "co-sale rights," are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company.

WHAT ARE LLC drag along rights?

A standard clause in many LLC agreements, a drag-along provision gives a majority member wanting to sell to an unrelated third party all or a substantial percentage of its membership interests in the company the right to force the other members to also sell all or a portion of their membership interests to the third ...

What is a shotgun deal?

Related Content. A shotgun clause is a mechanism of last resort where shareholders cannot settle a dispute by discussion and negotiation. It results in a forced sale of shares. Under the clause, one party, P1, offers either to buy the shares of the other party, P2, or to sell P1's own shares to P2 at a specified price.

What is anti dilution clause?

Anti-dilution provisions are clauses built into convertible preferred stocks to help shield investors from their investment potentially losing value. Dilution can occur when the percentage of an owner's stake in a company decreases because of an increase in the total number of shares outstanding.

What is a pay to play provision?

A "Pay to Play" provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round.

Can a 51 owner fire a 49 owner?

Creating a pay or profit-sharing arrangement. No owner can be fired or demoted without good cause. Outlining the responsibilities of both parties. The majority can't sell the business unless it's to the minority shareholder.

How do I kick out a minority shareholder?

Removing a minority shareholder will be simplest if you have a well-drafted shareholder's agreement. Such an agreement will usually stipulate that the majority shareholder can buy out the minority at a predetermined price, or at a price determined by a mechanism specified in the agreement.

Can I be forced to sell my shares in a company?

In general, shareholders can only be forced to give up or sell shares if the articles of association or some contractual agreement include this requirement. In practice, private companies often have suitable articles or contracts so that the remaining owner-managers retain control if an individual leaves the company.

Is anti-dilution common?

Full-ratchet anti-dilution is the easiest to calculate and also the least common method. It uses the lowest preferred share price as the conversion price for holders of preferred shares. Weighted average anti-dilution protection is far more common.

How do I protect my shares from being diluted?

Full Ratchet and Weighted Average Dilution Protection

Outlined in a company's funding and investment agreements, the most common form of anti-dilution provision protects convertible stock or other convertible securities in the company, by mandating adjustments to the conversion if more shares are offered.

How do you prevent founders from dilution?

The broad-based weighted average anti-dilution provision is the best one for the founders. A broad-based weighted average for shareholders of a company's preferred stock gives investors anti-dilution protection when a company issues new shares.

What is a piggy back clause?

A piggy-back clause is typically intended to protect the interests of a minority shareholder who does not have the financial ability to exercise a right of first refusal for the shares of a majority, or principal shareholder.

What triggers a shotgun clause?

A shotgun clause may happen with a shareholder offering to buy the shares of other partners at a specific price. The target shareholders then have the option either accepting the offer and selling their shares or buying out the originating shareholder at the specified price.

What is a Savoy clause?

The joint venture agreement contained what is known as a Savoy Clause. This allowed either joint venture partner to nominate a price at which they would sell their half to the other. If this was declined then the seller would be forced to buy it instead at the same price.

Can an LLC buyout a member?

Most LLC operating agreements contain a “buyout” provision allowing the LLC or its remaining members to buy the membership interest of a departing member. Buyout provisions can be structured however the LLC members see fit. Freedom of contract is one of the most attractive traits of an LLC.

Can an LLC purchase its own membership interests?

With LLCs, members own membership interests (sometimes called limited liability company interests) in the Company which are not naturally broken down into units of measure. You simply own a membership interest in the Company and part of your agreement with the other members is to describe what and how much you own.