What are drag-along and tag-along rights in an Ontario shareholders' agreement?

Drag-along and tag-along rights are provisions in a shareholders' agreement that govern what happens when a controlling shareholder wants to sell the business.

A drag-along right gives the majority shareholder (or a specified threshold of shareholders) the power to compel minority shareholders to sell their shares on the same terms. This is important for sellers because most buyers want to acquire one hundred percent of a corporation; a minority holdout can block a sale. Drag-along rights ensure the majority can deliver a clean transaction.

A tag-along right protects minority shareholders from being left behind. If the majority sells its shares, minority shareholders have the right to participate in the sale at the same price and on the same terms. Without a tag-along, the majority could sell to a buyer at a premium while the minority is left holding shares in a corporation under new ownership.

Both rights are usually triggered by specified thresholds — for example, a drag-along might require approval from shareholders holding seventy-five percent of outstanding shares before minorities can be compelled to sell.

These provisions should be drafted carefully to address price calculation, timing, and conditions that can vary between buyer and seller in a real transaction.