Drag Along Rights
Similar in nature to the tag along rights, the drag along rights gives priority to the majority shareholder of a company. Drag along rights allows the majority shareholder to drag along, or force, the minority shareholder into selling their shares in a company. This is typically done when a majority shareholder wants to eliminate any minority shareholders to facilitate a sale. The majority shareholder must give the minority holder the same price, terms and conditions that the majority shareholders receive. In most cases, drag along rights terminate with an initial public offering and are considered a standard part of an agreement to purchase stock.
When the majority shareholder in a corporation is determined to sell shares, they exercise their right to a drag along. Drag alongs are a legally protected process under the terms of the shareholder agreement. A typical drag along provision includes information about who is subject to the drag along. Another important factor in the drag along is the threshold at which the drag along is triggered. In most cases, it is a specific percentage of the shareholders who control the trigger. The minimum price that a drag along is conducted at is another option that is often laid out in the shareholder provisions. Any other benefits, limitations or warranties should all be spelled out as well.
Investors typically want to resist modifications to the drag along. A drag along agreement that overcomplicates the potential sale of the company is not conducive to an easy sale. Shareholders who oppose the sale of the company are forced to comply under the drag along agreement, and any roadblocks to that agreement will create chaos and unrest. Because the drag along protects the majority shareholder, the minority shareholder must find other ways to ensure that their rights are protected, while honoring their ownership agreement.