Of Drags and Tags

MEDIA ROOM

Minority shareholders are commonly perceived at a disadvantageous position due to their limited participation as more often than not, a shareholding in minority will not be in a position to enjoy the ability of certain key decisions. Absent in a well negotiated shareholders agreement, this can easily be the case.

Given the critical importance of the contractual transfer of rights of a private company, during the negotiation stage, one may seek to opt for ties that bind both the majority shareholder when taking up such a decision and also a minority shareholder from providing obstacles to any impending transaction from occurring.

Provisions on the transfer and transmission of shares are generally pre-negotiated and enshrined in the M&As of a company which among other establishes the principles shareholders in a company must follow for a successful cooperation. These may include, among others, Drag-Along and Tag-Along clauses which can be useful in the event of a sale of shareholding or company rights in the event of disparity of memberships.

A drag-along right enables a majority shareholder to force a minority shareholder to join in the sale or merger of the company. While designed to protect the majority shareholder from a minority’s decision to block a sale or merger, it can be viewed as beneficial from a minority shareholders’ perspective as it would require that price terms and conditions are the same across the board.

Tag along rights, on the other hand, are rights devised for minority shareholders to join the transaction and sell their minority stake in the company. In other words, this provision would offer the non-selling shareholders the opportunity to force the purchaser to acquire not just the majority shareholders’ shares but all of the shares. Again, at the same terms and conditions that would apply to the majority shareholder.

In view of this, it is evident that when drafting Shareholders Agreement, ideally shareholders should consider the potential benefits arising from drafting these types of clauses.