How do drag-along rights work?

A drag-along

drag-along

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.

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Tag-Along Rights Definition - Investopedia

right is a provision or clause in an agreement that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

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.

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.

What is the difference between tag along and drag-along rights?

Tag-along or co-sale rights are essentially the opposite of drag-along rights. Whereas tag-along rights give minority shareholders negotiating rights in the event of a sale, drag-along rights force the minority shareholders to accept whatever deal is negotiated by majority shareholders.

Tag-Along and Drag-Along Rights

What is the purpose of a drag along provision?

A drag-along right is a provision or clause in an agreement that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

Are drag along rights common?

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.

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.

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.

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 drag along rights in shareholders agreement?

Drag Along provision in shareholders' agreement (Right to Majority Shareholders) A drag along provision allows the majority shareholder(s) to require the minority shareholder(s) to sell their shares. The aim of drag along rights is to provide liquidity, flexibility and an easy exit route for a majority shareholder.

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.

What is pro rata right?

A pro rata right is a right that is given to an investor that allows them to maintain their initial level of ownership percentage during later financing rounds.

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.

Can I be forced to sell my shares?

Can you force a sale of the shares? There is no automatic right for the majority shareholders to force a sale by a minority shareholder. Conversely, there is no automatic right for a minority shareholder to force the majority to buy their shareholding.

How do you squeeze out a minority shareholder?

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.

How do you calculate a pro rata settlement?

This is calculated by dividing the ownership of each person by the total number of shares and then multiplying the resulting fraction by the total amount of the dividend payment.

How do I work out pro rata ownership?

The math to calculate the pro-rata amounts is simply (target ownership %) x (number of new shares being issued) x (share price at new round).

How is pro rata follow on calculated?

It is quite straightforward to calculate how much an existing investor with pro rata rights needs to invest in order to maintain their shareholding percentage – just multiply their percentage ownership before the funding round by the total number of new shares being issued and then by the share price.

What is full ratchet anti-dilution?

“Full ratchet” refers to a type of anti-dilution protection for preferred stock in the event of a down round of series financing that adjusts the number of common shares the preferred shares can be converted into based on the new share price.

What is pay to play financing?

A pay-to-play provision requires a given investor to participate fully in the financing of your business venture. Full participation is defined here by anteing up in future rounds of fundraising, not just the seed or starter round, on a pro-rata basis or more.

What is a pay to play financing round?

Pay to play simply means requiring money to be a part of some activity. In the corporate world, individuals wishing to be part of a transaction must often put in money. This is common in investing, where an individual must put in funds to be part of a future equity round.

Can a shareholder give up his shares?

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.

Can a majority shareholder force minority to sell?

If we can't come to an agreement, there's no simple way to compel the minority shareholder to sell. In general, the majority shareholder will need to address the minority's reasons for refusing to sell, convincing the minority to accept a fair value for their shares.