The goal of Drag Along Rights is to offer liquidity, flexibility and a simple way out to a majority shareholder. Given that many buyers of a target company want 100% control of the business and rarely accept that a minority shareholder retains a minority stake, it would be difficult for a majority shareholder to accept an offer if minority shareholders do not cooperate and block the sale of a company. The towing device itself is important for the sale of many businesses, as buyers often seek full control of a business. Towing rights help eliminate current minority shareholders and sell 100% of a company`s shares to a potential buyer. For example, a bidder wants to buy the entire company. The majority shareholders, who own more than 50% of the company, agree to sell their shares. Therefore, in this situation, majority shareholders can “transport” the remaining minority shareholders and ask them to sell their shares. As a result, the tenderer may acquire the entire undertaking. In order to ensure that you are aware of and better understand the interior of the Tag Along or Drag-Along legal situations in which you may participate, it is best to consult with a lawyer when forming or updating partnership agreements in which you may participate, to ensure that you know exactly what you are signing up for. While participation rights themselves can be clearly described in an agreement, the distinction between majority and minority may be something to watch out for.
Companies can have different types of share classes. There are specific provisions that you can find in tag-along or drag along clauses: some shareholders, such as venture capitalists or angel investors, may require that drag Along provisions be conditional and limited or have certain exceptions. Shareholder agreements usually include a mechanism to remedy the situation of deadlock or litigation between shareholders. (An impasse is a situation in which the company is unable to do anything because the board or shareholders can`t agree on the right path forward.) When negotiating such clauses in the shareholders` agreement, the above-mentioned highlights serve as reference points and useful trading instruments that could make a significant difference to a shareholder`s return on investment. .