dragalong

A dragalong, or drag-along right, is a contractual provision found in shareholders’ agreements, purchase agreements, or company charters that allows the majority shareholders to compel minority shareholders to participate in a sale of the company on the same terms and conditions. The purpose is to prevent minority holders from blocking an exit that the majority believes is in the company’s best interests or that would be attractive to a buyer.

Mechanics and scope: Dragalong is typically triggered when a sale transaction receives the approval of the board and a specified majority of shareholders, such as holders of a defined majority of voting shares. Once triggered, all shareholders must transfer their shares on the same economic terms, price per share, form of consideration, and closing conditions offered to the majority. The terms often require that the buyer extend the same price and terms to all shareholders, ensuring parity and preventing selective divestment.

Common features and variations: Dragalong rights are usually defined by a threshold percentage, a description of the sale event that qualifies, and any exemptions or exclusions (for example, certain employee-owned shares or classes of stock). They are commonly paired with tagalong rights, which give minority shareholders the option to join the sale on pro rata terms but do not force minority participation.

Implications: Dragalong rights facilitate swift exits and enhance a buyer’s ability to acquire the entire company, but they can restrict the bargaining power of minority shareholders. Enforceability depends on the governing law and the exact contract terms, and these provisions are particularly prevalent in venture capital and private equity deals, where preferred stock arrangements aim to enable orderly liquidity events.