What Is A Drag Along Provision in A Shareholder Agreement?

A drag-along provision is a contractual clause often included in shareholder agreements, especially in private companies. This provision allows majority shareholders to force minority shareholders to join in the sale of the company. The purpose of a drag-along provision is to facilitate the sale of the entire company by ensuring that all shareholders are on board with a proposed sale, even if they initially may not be willing to sell.

Here’s how a drag-along provision typically works:

1. Offer to Sell:
   • When a majority shareholder (or a group of shareholders with a significant stake) receives an offer to buy the entire company, the drag-along provision may be triggered.
2. Notice to Minority Shareholders:
   • The majority shareholder(s) must notify the minority shareholders of the offer and the proposed terms of the sale.
3. Forcing Minority Shareholders to Join:
   • The drag-along provision allows the majority shareholder(s) to force the minority shareholders to join the sale on the same terms and conditions as offered to the majority shareholder(s).
4. Ensures Unity in the Sale:
   • The purpose of the drag-along provision is to prevent a situation where a minority shareholder’s refusal to sell could impede or complicate a potential sale of the entire company. It ensures that all shareholders are on the same page and that the sale can proceed smoothly.
5. Protects Majority Shareholders:
   • The drag-along provision is a protective measure for majority shareholders, giving them the ability to realize the benefits of a favorable sale without being hindered by the dissenting views of a minority shareholder or shareholders.
6. Thresholds and Conditions:
   • The specific conditions and thresholds triggering the drag-along provision are typically outlined in the shareholder agreement. This might include a minimum percentage of ownership required for the provision to be invoked.

It’s important for all shareholders to carefully consider and negotiate the terms of drag-along provisions when drafting a shareholder agreement. These provisions have implications for the exit strategy of shareholders and the overall dynamics of the company’s ownership structure. As with any contractual provision, legal advice is recommended to ensure that the terms are fair, clear, and in accordance with the goals of all parties involved.