Tag Along Agreements

By stancutler,

  Filed under: Uncategorized
  Comments: None

While the drag-along rights themselves can be clearly detailed in an agreement, the distinction between the majority and the minority can be something to watch out for. Companies may have different types of stock categories. A company`s statutes refer to the ownership and voting rights of shareholders, which can affect the majority or minority. 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. The main objective of Tag Along rights is to protect minority shareholder shares in each transaction. Majority shareholders are generally large companies with many connections, better bargaining power and stronger capital, and as such, they are more likely to find a buyer for their shares. [3] Therefore, Tag Along rights allow the minority shareholder to increase the liquidity of its shares because it has the opportunity to participate in any agreement reached by the majority and to avoid them being “left” in the event of an agreement. [4] Another reason is that when a majority shareholder sells its interest in a business, this dominant position allows the seller to sell at a price higher than the intrinsic price of the stock itself, which is called the control premium, because the majority owner has greater freedom to make decisions for the business. [5] The privileges of tag along allow minority holders to also participate in this premium and sell their shares at that higher price at each sale between a majority and a third party.

[4] Since Along tag rights are rights and not obligations, minority shareholders may choose to exercise them. Thus, minority shareholders have a choice when the majority of equity changes ownership. You can choose to remain the owner of the business or invoke the Tag Along rights and participate in the sale. [1] In some cases, drag along rights may be more popular in agreements with private companies. The drag-along rights of privately held shares may also end when a company goes public with a new share offer. As a general rule, the IPO of stock classes will cancel old ownership agreements and, if necessary, create new drag-along rights for future shareholders. As with other provisions of contract law, Along tag rights are derived from the doctrine of contractual freedom and are governed by contract law (in common law countries) or by the law of obligations (in countries of civil law). Since tag along rights are contractual terms between private parties, they often end up in venture capital firms and private equity firms, but not in state-owned enterprises. [2] In this sense, despite the nomenclature, tag-along rights are considered enforceable and functional in the same way as any other contractual clause, but not as a law in the normal sense of the word (for example. B freedom of expression).

Comments are closed for this post.