In this post we will discuss what a drag along clause is, how it is triggered and its use in a shareholder agreement. A drag along clause is used when there are majority and minority shareholders. It usually favours the majority shareholder. A drag along clause is essentially a right that enables the majority shareholder to force a minority shareholder to join the sale of the company. As the term ‘drag along’ suggests, it allows the majority shareholder to drag the other shareholders along. As a founder, while setting up your company, you should be aware of what options are available to you in the event of the sale of the company. At the time of drafting the shareholder agreement, it is crucial that rights, obligations and exit options are clearly defined. A drag along clause is usually found in the shareholder agreement.
What is a drag along clause?
A drag along clause is the clause in the shareholder agreement that allows a majority shareholder to force the minority shareholders to join in the sale of the company. The majority shareholder who triggers the drag along clause must give the minority shareholder(s) the same price, terms, and conditions as any other seller. The drag along clause is usually negotiated into a shareholders’ agreement by an institutional investor such as a business angel, venture capital investor or private equity investor for whom the exit from the investment is of particular importance. The power to trigger the drag along lies with the majority shareholder so that the minority shareholders are not able to hinder the selling process.