Drag-Along Clause

Introduction

In the world of corporate finance and participation agreements, the drag-along clause is a widely used instrument. This clause, often referred to as “drag-along” or “bring-along,” allows majority shareholders to force minority shareholders to sell their shares in the event of a sale of the company. In this article, we will discuss in detail the drag-along clause, how it works, its advantages and disadvantages, and its importance in the context of corporate sales.

Definition of the drag-along clause

The drag-along clause is a contractual agreement between the shareholders of a company. It gives the majority shareholder or shareholders the right, in the event of a sale of the company, to require the minority shareholders to sell their shares on the same terms. This clause is often stipulated in shareholders’ agreements or participation contracts.

Purpose and application

Protection of the interests of the majority shareholders

The drag-along clause primarily serves to protect the interests of the majority shareholders. If a potential buyer is interested in acquiring the entire company, the clause allows the majority shareholders to carry out a sale without being blocked by the minority shareholders.

Facilitation of company sales

The clause facilitates the sale of a company by ensuring that a buyer can acquire 100% of the shares. This is especially important for buyers seeking complete control over the company.

Setting the conditions

The drag-along clause stipulates that minority shareholders must sell their shares on the same terms as those applicable to majority shareholders. This includes the sales price, payment terms and other relevant conditions.

Advantages and disadvantages

Advantages

• Efficiency in company sales: The clause enables an efficient sales process by preventing minority shareholders from blocking the sale.
• Attractiveness for buyers: Companies with a drag-along clause may be more attractive to buyers because they offer the possibility of a full takeover.

Disadvantages

• Restriction of minority shareholders’ rights: minority shareholders can be forced by the clause to sell their shares against their will.
• Possible disadvantage: In some cases, the clause may result in minority shareholders having to sell their shares under unfavorable conditions.

Legal aspects

It is important to note that the design and enforcement of the drag-along clause depends on the applicable legal system. Some jurisdictions may provide certain protections for minority shareholders, and there may be requirements for the exercise of the clause, such as the need for adequate notice.

Practical considerations

When designing a drag-along clause, the interests of both majority and minority shareholders should be taken into account. It is advisable to establish clear criteria for triggering the clause and to ensure that the terms of the sale are fair to all shareholders. In addition, it is important to consider the applicable legal requirements.

Example

Suppose a company has three shareholders: A holds 70% of the shares, B holds 20% and C holds 10%. The company has a drag-along clause in its shareholders agreement. A potential buyer appears and wants to acquire the entire company. Shareholder A wants to sell, but B and C are not interested at first. However, due to the drag-along clause, A can oblige B and C to sell their shares under the same conditions at which A sells.

Conclusion

The drag-along clause is a powerful tool used in shareholder agreements to facilitate the sale process of a company and protect the interests of the majority shareholders. While it can offer significant benefits, particularly in terms of the efficiency of corporate sales, it also has the potential to restrict the rights of minority shareholders. It is therefore important to be careful in the drafting and application of this clause and to seek legal advice.