The purpose of a Tag Along provision is to ensure that small shareholders are not left behind if a large shareholder decides to leave the company. (For more information on minority shareholder protection, click here.) You will find special provisions in the Tag or Drag-Along clauses: in most cases, the majority shareholder can only claim participation rights if the transfer to the third-party buyer is made against payment in cash. While such arrangements can be effective in resolving impasses quickly, they also have the potential to achieve unfair results, particularly if there is a significant gap between the parties` financial situations. Therefore, when used, these clauses are generally tailored to the specific circumstances and contain controls and control controls to ensure that they cannot operate unfairly. In short, the agreement on a tag along right prevents the situation in which a majority shareholder obtains a profitable exit, while minority shareholders sit on their minority stakes without being able to sell them. A “Drag Along” clause allows a large shareholder (or group of shareholders) to “drag” the other shareholders into a joint sale of the entire company. Although towing rights are highly privileged over majority shareholders by avoiding them being “tied” to the company, these types of clauses also ensure that minority shareholders are treated in the same way as the majority shareholder. Participation and tag along rights are important forms of making investments in a shareholders` agreement. A common point of negotiation is whether the Tag Along law should apply: Tag Along rights are used to protect minority shareholders. To get an idea of their functionality, imagine the following situation: co-founders, angel investors, and venture capital firms often rely on Tag Along rights.
Suppose, for example, that three co-founders create a technology company. Business is going well, and the co-founders think they`ve proven the concept enough to evolve. The co-founders then sought external investment in the form of a seed cycle. A private equity investor sees the value of the business and offers to buy 60% of it, which requires a large amount of equity to offset the risk of investing in the small business. The co-founders accept the investment and make the investor Angel the largest shareholder. While a “Tag along” clause protects retail investors, a “Drag Along” provision protects the interests of the large shareholder(s). All business creators or investors are faced with a situation where they are faced with exit opportunities. It is therefore important to define a clear strategy for the company and to think about exit clauses. Tag Along and Bring Along rights are not only able to weigh the interests of business owners and future investors, but also allow for a clear and enforceable legal situation.