Tag-along rights: Overview, definition and example
What are tag-along rights?
Tag-along rights are provisions in a contract that allow minority shareholders to sell their shares if a majority shareholder decides to sell theirs. Essentially, if the majority shareholder sells their shares, the minority shareholders have the right to "tag along" and sell their shares on the same terms and conditions. This ensures that minority shareholders can benefit from the same deal and not be left behind when the majority shareholders sell their stake in the company.
Why are tag-along rights important?
Tag-along rights are important because they protect minority shareholders in a sale. Without tag-along rights, a minority shareholder might find themselves stuck in a company with new majority owners they don’t want to work with. By ensuring that minority shareholders can sell on the same terms as the majority, tag-along rights ensure fairness and prevent any disadvantage for the smaller shareholders.
Understanding tag-along rights through an example
Imagine a company where one shareholder owns 70% of the shares, and the other two shareholders own 15% each. If the 70% shareholder decides to sell their shares to a larger company, the 15% shareholders would have the right to tag along in the sale. This means they can sell their 15% on the same terms and conditions as the majority shareholder, ensuring they are not left out of the opportunity.
For example, if the company is sold for $10 million and the 70% shareholder agrees to sell their shares for $7 million, the two minority shareholders can each sell their 15% at the same price, ensuring they benefit equally from the deal.
Example of a tag-along rights clause
Here’s how a tag-along rights clause might look in a shareholder agreement:
“In the event that a majority shareholder proposes to sell their shares in the Company, the minority shareholders shall have the right to sell their shares on the same terms and conditions as those offered to the majority shareholder. The majority shareholder shall notify the minority shareholders, and the minority shareholders may elect to sell their shares alongside the majority shareholder.”
Conclusion
Tag-along rights ensure that minority shareholders can participate in a sale of the company on equal terms with the majority. These rights provide protection for smaller shareholders, giving them the opportunity to exit the company on the same terms as larger shareholders. For businesses, including tag-along rights in shareholder agreements is a crucial way to maintain fairness and keep all shareholders aligned during a sale or transfer of shares.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.