If you are investing in a company as a minority shareholder, you generally want to make sure certain protections are included in the investment documents. Such provisions allow you a certain amount of control, despite your minority stake. Tag-along rights are one of these provisions and operate to ensure that minority stakeholders have access to deals negotiated by majority stakeholders.
Tag-along rights are a common contract provision, but they’re generally not offered automatically to minority shareholders. Accordingly, talking to a Priori lawyer can help you protect your rights as a minority shareholder or to consider whether you should give this provision as a majority shareholder.
What Are Tag-Along Rights?
Tag-along rights are contractual provisions designed to protect minority shareholder rights. Tag-along rights ensure that if a majority shareholder sells his or her stake in the business, the minority shareholder has the right to join the same transaction on the same terms, i.e. “tagging along” to sell the minority stake in the company. A tag-along obligates the majority shareholder to include minority shareholders in a beneficial sale transaction.
Benefits of Tag-Along Rights
Tag-along rights protect minority shareholders by facilitating exits and preventing minority shareholders from getting stuck as minority shareholders in a company after a major corporate change of control event. Finally, because tag-along rights ensure that minority shareholders can sell on the same terms as majority shareholders, the right helps minority shareholders access the better prices available for shares that offer a controlling interest in a company (a control premium).
Potential Problems of Tag-Along Rights
While tag-along rights are relatively uncontroversial in most cases, not all majority stakeholders like to be confined by such an obligation.
Occasionally, the tag-along can make it more difficult for a majority shareholder to exit in a single transaction. This is because tag-along rights are expressed as a right to a pro rata share of the aggregate consideration paid by the third party purchaser to all of the other shareholders participating in such proposed transfer. In cases where a potential buyer does not wish to increase the size of their offer to include the additional shares of minority shareholders, this means that some of the shares sold will actually be those of the minority shareholder. Rather than disposing all shares, the majority shareholder instead becomes a minority shareholder who must negotiate with another party before exiting the company.
Depending on your needs, the cost of hiring a lawyer to help you negotiate tag-along rights and other aspects of a financing can vary. Hourly rates for lawyers with relevant typically range from $150 to $450 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What’s the difference between tag-along rights and drag-along rights?
Tag-along rights allow minority shareholders to participate in a sale alongside and on the same terms as majority shareholders. Drag-along rights, on the other hand, protect the interests of majority shareholders by allowing majority shareholders to force minority shareholders to sell their shares alongside and on the same terms as the majority shareholder.
Do tag-along rights make it impossible for majority shareholders to totally exit an investment?
No. In many cases, shares from the minority shareholders will simply be rolled into a larger deal, facilitating a sale by both minority and majority shareholders.