A tag-along provision, also known as a “co-sale” or “piggyback” provision, is a clause commonly found in shareholder agreements, especially in the context of private companies. This provision protects minority shareholders by giving them the right to join in the sale of shares initiated by a majority shareholder. It aims to ensure that minority shareholders have the opportunity to sell their shares on the same terms and conditions as the majority shareholder, should the majority shareholder decide to sell their stake in the company.
Here’s how a tag-along provision typically works:
- Majority Shareholder Receives an Offer:
- When a majority shareholder (usually someone holding a significant portion of the company’s shares) receives an offer from a third party to purchase their shares, the tag-along provision is triggered.
- Notice to Minority Shareholders:
- The majority shareholder is required to notify the minority shareholders of the offer and the proposed terms of the sale.
- Option for Minority Shareholders to Join the Sale:
- The tag-along provision grants the minority shareholders the right to “tag along” with the majority shareholder and sell their shares on the same terms and conditions as offered to the majority shareholder.
- Protection for Minority Shareholders:
- This provision is designed to protect minority shareholders from being left behind in the event of a sale. Without a tag-along provision, a majority shareholder could sell their stake, leaving minority shareholders at the mercy of a new majority owner with potentially different goals or strategic plans for the company.
- Equal Treatment:
- By allowing minority shareholders to join the sale, the tag-along provision ensures that all shareholders are treated fairly and equally in the event of a significant transaction. This aligns with principles of fairness and protection of minority interests.
It’s important to note that the specifics of tag-along provisions can vary and are subject to negotiation among shareholders when drafting the shareholder agreement. The percentage of ownership required to trigger the tag-along provision, the process for notifying minority shareholders, and other details will be outlined in the agreement. These provisions are essential for maintaining a balance of power and protecting the interests of all shareholders in a closely held company.
