Canopy Law > Shareholder Agreements > Exit planning: ‘Drag along’ and ‘Tag along’ clauses

Exit planning: ‘Drag along’ and ‘Tag along’ clauses

You might not want to think about the end when you’re setting up your business, as it’s still new and precious; a puppy you want to nurture and protect from the world. But, as all good bank robbers know, you always need an exit strategy.

In a Shareholder Agreement, an exit plan takes the form of a proposal for selling or winding up the business in the event of certain criteria being met. This might include a certain turnover target being achieved, an offer being received from an interested buyer, or, worst-case scenario, if the business is failing. As shareholders can have differing motives for investing, they are likely to have different views on when is the right time to get out of the company; a cohesive exit strategy can prevent discord.

A buyer of a company will almost always want to purchase 100% of the shares. However, there is no requirement in company law for all of the Shareholders to sell their shares; this means that a single shareholder (even one with a minority stake) can block the deal for the rest of the shareholders.

This seems a little unfair, so that’s where ‘drag along’ and ‘tag along’ clauses can play their part in a Shareholder Agreement.

A ‘drag along clause’ allows a majority of shareholders to accept an offer for all of the shares in the company, forcing the minority shareholders to sell to the interested buyer as well. Thus, the minority are ‘dragged along’ in the sale.

A ‘tag along clause’ protects the minority shareholders by allowing the minority to ‘tag along’ with a proposed sale of the company if they want to. The clause prevents the majority shareholders from selling unless the interested buyer makes an equal offer to the minority shareholders on the same terms as offered to the majority shareholders.

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