Introduction
The tag-along clause, also known as a “co-sale clause,” is a contractual provision often found in partnership agreements of companies, especially start-ups and joint ventures. It protects the rights of minority shareholders by granting them the right to sell their shares under the same conditions as apply to majority shareholders when they sell their shares.
- Tag-along clause: Protects the rights of minority shareholders when selling shares.
- How it works: Allows minority shareholders to sell under the same conditions as majority shareholders.
- Protection: Prevents unfavorable changes in company management and enables exit.
- Fairness: Ensures that minority shareholders are not treated unfairly.
- Liquidity: Enables easier sales through participation in majority sales.
- Complexity: Can make the sales process more complicated due to the large number of parties involved.
- Delays: Additional negotiations can prolong the sales process.
Functionality
If a majority shareholder (or a group of shareholders holding a majority of shares) decides to sell its shares to a third party, the tag-along clause allows minority shareholders to join the sale and sell their shares under the same conditions. This means that minority shareholders can benefit from the same prices, payment terms and other conditions that the majority shareholder negotiates.
Advantages
- Protection of minority shareholders: The clause protects minority shareholders from an unfavorable change in corporate governance by allowing them to exit the company if control of the company is sold.
- Fairness: It ensures that minority shareholders do not have to sell on less favorable terms than majority shareholders.
- Liquidity: It offers minority shareholders an opportunity to sell their shares more easily, as they can participate in a sale initiated by majority shareholders.
Disadvantages
- Complexity: Implementing a tag-along clause can make the sales process more complex because more parties are involved.
- Potential delays: The sale may be delayed if minority shareholders exercise their rights, as this may require additional negotiations.
Conclusion
The tag-along clause is an important instrument for protecting the rights of minority shareholders. It ensures that they are treated fairly in the event of a sale of the majority shares and provides them with a means of liquidity for their investments.
