Drag-along right
A drag-along right allows shareholders who hold enough shares, usually a defined majority, to force the remaining shareholders to sell their shares on the same terms if the majority agrees to sell the company. It exists so a buyer can acquire all the shares even if a small holder refuses to sell.
Selling a company is much simpler when a buyer can acquire all of its shares in one transaction. A drag-along right, negotiated in advance in a shareholder agreement, makes that possible even if not every shareholder wants to sell.
How it typically works
- A threshold, such as a majority or a supermajority of shares, must agree to sell
- Once that threshold is met, remaining shareholders can be required to sell on the same price and terms
- The dragged-along shareholders usually get the protections the majority negotiated, since they are bound by the same deal
Why buyers ask for it
Buyers often will not proceed, or will pay less, if a small minority of shareholders could hold out and block the transaction, or force a structure where the buyer ends up with less than full ownership. A drag-along clause removes that leverage before it becomes a problem, which is why it is common in shareholder agreements for growing companies.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Treadstone LawLegal commentaryCorporate Law
- 02Treadstone LawLegal commentaryMergers & Acquisitions
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