Drag-along Right

A drag-along right allows the majority of shareholders to force the minority to sell as well. If a buyer is found for the entire company, minority shareholders cannot block the sale. This allows a sale to be enforced on uniform terms for everyone. The practical reason is straightforward: buyers normally want 100 percent of the shares, because remaining minorities complicate later management, distribution policy and financing, and they regularly pay less for anything short of full ownership.

Without such a clause a single small shareholder could prevent the sale or sell their consent at a high price. The provision is agreed in the shareholders' agreement and, where appropriate, the articles, and its design matters: it sets the triggering majority, often combined with the consent of specified investor groups, equal treatment of all shareholders on price and terms, sometimes a minimum price or valuation, and the scope of obligations that may be imposed on the dragged shareholder, such as warranties and indemnities.

For the minority it matters that liability does not exceed their share of proceeds and that they are not forced into non-compete obligations going beyond the customary. The counterpart is the tag-along right, allowing the minority to join a sale by the majority on the same terms. Both clauses regularly appear side by side in shareholders' agreements.

Besides equal treatment, the minority's key question is what obligations it must assume in a forced sale: limiting them to warranties about itself and its own shares is customary, while responsibility for operating warranties is negotiated separately. A liability cap not exceeding the minority's share of proceeds also needs settling. A minimum review period is advisable in practice, since otherwise a sale is completed under unreasonable time pressure.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.