M&A Glossary
Drag along and tag along: what these clauses really mean
These are two clauses in a shareholders’ agreement that decide what happens to minority shareholders when the majority sells the company. Drag along lets the majority pull the minority into the transaction. Tag along lets the minority join it on the same terms. The first protects the buyer and the majority, the second protects the minority.
Drag along
If the majority shareholder finds a buyer for the whole company, drag along obliges the minority to sell their shares on the same terms. Without it, one shareholder holding a few per cent can block the transaction or extract a disproportionate price for their stake.
Buyers almost always want one hundred per cent. Drag along is the tool that makes that possible, which is why its absence from the articles tends to be discovered only when it is too late to add it without the consent of those it would bind.
Tag along
This works in reverse. If the majority sells its stake, the minority can require the buyer to purchase their shares too, at the same price per share. It protects against a situation where the majority exits at a profit while the minority is left with an unknown new partner and no way out.
Drag along protects
- the majority shareholder
- a buyer who wants 100 per cent
- the ability to complete the deal
Tag along protects
- the minority shareholder
- against being stuck with a new owner
- equal terms on exit
What to look at in the drafting
The detail sits in thresholds and carve-outs. At what percentage drag along triggers. Whether the minority gives the same representations and warranties as the majority seller, and up to what amount they are liable. Whether tag along covers the whole minority stake or only a proportionate part. Whether the price per share is calculated identically, or whether the majority can allocate itself separate consideration for a non-compete and so reduce the price paid for the shares themselves.
These clauses are written at the start, when everyone gets along, and applied years later, when interests have diverged. They are worth reading from the perspective of that second moment.
Frequently asked
Questions about drag along and tag along.
Where are these clauses recorded?
In the articles of association or in a separate shareholders’ agreement. The articles are public in the register, the shareholders’ agreement is not, which is often an argument for the latter.
What if the articles do not contain them?
Then each shareholder decides on their own shares. Selling the whole company then requires everyone’s consent, which with a dispersed shareholder base can stop a transaction. Adding the clauses means amending the articles, and so obtaining the consent of the very people they would constrain.
Do both clauses usually appear together?
In well-drafted agreements, yes. One without the other creates an imbalance that surfaces exactly when the company is being sold.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge