What are drag-along and tag-along rights in a shareholder agreement?
Drag-along and tag-along rights are companion provisions commonly found in shareholder agreements, particularly where there is a majority and a minority shareholder.
A drag-along right protects the majority. If a buyer wants to purchase 100% of the company, the majority shareholders can compel the minority shareholders to sell their shares on the same terms. This makes the company more attractive to buyers, because a purchaser rarely wants to acquire a business with holdout minority shareholders attached.
A tag-along right (sometimes called a co-sale right) protects the minority. If the majority shareholders sell their stake to a third party, minority shareholders have the right to sell their shares on the same terms rather than being left behind with a new, unknown majority owner.
Together, these rights help balance the interests of shareholders with different ownership percentages. In an Ontario private corporation, they are negotiated provisions — the law doesn't impose them automatically. Whether you should push for them depends on your ownership position and the exit strategy for the business. Speaking with a corporate lawyer before finalizing your shareholder agreement is advisable.
Key takeaways
- Drag-along rights allow the majority to compel the minority to sell in a full-company sale.
- Tag-along rights let minority shareholders join a sale on the same terms as the majority.
- Both provisions need to be expressly negotiated and included in the shareholder agreement.
- They work together to balance majority and minority interests on exit.