It is often debated whether minority shareholders who use their tag right Along should be required to provide the full range of insurance and guarantees that resemble the majority seller shareholder. The drag-along system itself is important for the sale of many businesses, as buyers often seek total control of a business. Drag-along rights help eliminate existing minority owners and sell 100% of a company`s securities to a potential acquirer. If you would like to learn more about what is normally covered by a shareholders` agreement, read our separate contribution here or check out our SHAREHOLDER Agreement FAQs. If you want more details, we advise you to download our full guide. Drag along rights can be introduced through equity raising or during merger and acquisition negotiations. For example, when a technology start-up opens a Series A investment cycle, ownership of the company is sold to a venture capital firm for capital injection. In this concrete example, the majority stake belongs to the Chief Executive Officer (CEO) of the company, who owns 51% of the company`s shares. The CEO wants to retain control of the majority and protect himself even in the event of a possible sale. To do so, it negotiates a drag-along right with the offer of shares in a venture capital firm and gives it the right to compel the venture capital firm to sell its shares in the company if a buyer ever shows up. Sometimes the towing of provisions comes with a pre-emption clause, so that small shareholders have the right to buy the entire business rather than being forced to work with a new third-party purchaser. It can be concluded that both clauses, although in different ways, are protected and minority shareholders are protected.
They can therefore be seen as an exit of investors from their investment and also as a means of protecting minority shareholders from any possible abuse by the controlling shareholders. One way or another, there is no denying their more regular presence and their growing importance in legal practice, especially in a context of profound globalization. Therefore, these clauses should be known and covered not only by lawyers, but also by investors, taking into account the fact that these provisions are means of guaranteeing their investments. In this agreement, Celgene`s shares were withdrawn from the stock exchange. Minority shareholders were required to comply with the terms of the agreement and were not eligible for special considerations. If Celgen`s shares had not been taken off the stock exchange, drag along and tag along rights could have become more of a factor. In some cases, such as this, majority shareholders may negotiate special share rights under an alternative class structure that may not be made available to minority shareholders because of the effects of drag-along rights. Share offers, mergers, acquisitions and acquisitions can be complicated transactions. Certain rights may be included and introduced under the terms of a stock class offer or in a merger or acquisition agreement. As a general rule, minority shareholders subject to drag-along rights should not and are not expected to provide insurance and guarantees other than capacity and securities. This is done on the basis that they have no control over the guarantee package agreed by the seller`s majority shareholder in the sales document.