Drag along and Tag along clauses shareholder agreements

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A Shareholders Agreement also sometimes called a Security Holders Agreement (SHA) is a written agreement between the shareholders of a company and sets out in a transparent manner the obligations, rights and responsibilities shareholders and directors have to a company and to each other to ensure its efficient and effective management.

An important aspect of any SHA are Drag along and Tag along clauses.

I am often asked to explain what they are, their implications and who do they benefit.

In simple terms a drag along protects the interests of the major shareholder(s) and a tag along clause protects smaller shareholders.

They are usually very important to investors in a company.

Drag along clauses

A drag along clause will require the minor shareholder(s) to sell their shares if the majority shareholder(s) receive an offer to purchase their shares.

This type of clause in a SHA is there solely to protect the majority shareholder(s) who generally hold more than 51% of the shares in the company.

It is very common in start-ups and amongst entrepreneurs where the majority shareholder(s) do not want to be held back by investors if an offer to purchase the company is made.

I often see investors seeking to amend the clause in a SHA for their protection before investing in a company.

Tag along clauses

A Tag along clause enables the minority shareholder to sell their shares in the company by joining a majority shareholder when they are selling their shares.

It places a positive onus on the majority shareholder to ensure any minority shareholders are included in any negotiations to sell their shares.

The benefit of this type of clause is that if a majority shareholder(s) decides to sell the minority shareholder may not be left holding unsalable or devalued shares.

How can FC Lawyers help?

FC Lawyers have a very experienced and expert team of corporate lawyers who have significant experience in drafting Shareholders and Security Holders Agreements.

Contact our team today to discuss your needs.

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