For many investors, ensuring a smooth exit is a vital part of any investment. Accordingly, many majority shareholders insist on drag along rights and other contractual provisions that protect the marketability of their interest. Drag along rights, also known as bring along rights, accomplish this by allowing a majority investor to force minority investors to sell their shares alongside the majority investor -- and on the same terms -- under certain predetermined circumstances.
Whether you are concerned about the impact of drag along rights as a potential minority shareholder or whether you want to ensure the strength of the drag along provision as a potential majority shareholder, it is important to talk through the implications of drag along rights with an experienced financing and corporate attorney. Priori can connect you with a top financing attorney to help you negotiate the most advantageous drag along provision for your particular situation.
What Are Drag Along Rights Or Bring Along Rights?
Drag along rights are drafted as drag along provisions within a contract. Drag along rights are designed to protect the marketability of the shares owned by majority shareholders. A drag along provision allows a majority shareholder to force minority shareholders to agree to a sale of the company supported by the majority shareholder. In other words, minority shareholders are “dragged along” by drag along provisions whether they like the terms of the deal or not. A drag along provision forces minority shareholders to sell their shares, but drag along rights also guarantee such shareholders the same price, terms and conditions as the other sellers.
Advantages of Drag Along Rights
Drag along rights make it easier for majority shareholders to find a potential buyer and successfully negotiate a sale because they provide assurances to potential buyers that once the majority shareholder is on board with the transaction, completing the deal won’t require additional shareholder consent. For this reason, private equity investors often require drag along provisions, as private equity investors typically value the ability to exit an investment within a certain timeframe.
Disadvantages of Drag Along Rights
The disadvantages of drag along rights generally apply only to the minority shareholders subject to the forced sale provisions. Accordingly, even if minority shareholders cannot entirely prevent the adoption of a drag along provision, they generally seek to limit the circumstances in which a majority shareholder may exercise the drag along rights. This helps limit the circumstances under which minority shareholders can be forced into a sale with a valuation and terms they would not otherwise have approved.
Priori Pricing
Depending on your needs, the cost of hiring a lawyer to help you negotiate drag along rights and draft drag along provisions can vary. Hourly rates for lawyers with relevant experience typically range from $150 to $450 per hour. In order to get a better sense of cost for your particular situation, put in a lawyer request to schedule a complimentary consultation and receive a free price quote from our lawyers.
FAQ
What is the difference between drag along rights and tag-along rights?
Drag along rights and tag-along rights achieve the same basic purpose, but they benefit opposite parties. While drag along rights are intended to protect the majority investor’s ability to exit an investment by forcing the minority shareholder to sell their shares as part of the majority shareholder's approved transaction, tag-along rights are intended to protect the minority shareholders by allowing them to participate in any sale made by the majority shareholder under the same -- likely beneficial -- terms.
Is it possible to mitigate the harm that drag along rights may do to minority interests?
Yes. Minority shareholders can negotiate to limit the circumstances in which the majority shareholder may exercise the drag along rights. For example, the drag along provision could be limited to use as a last resort after the majority shareholder has taken certain actions. Notice requirements, efforts requirements, and mandatory waiting periods can also help increase protection for minority shareholders. A corporate attorney can help you consider your specific situation and negotiate accordingly.