Understanding tag-along and drag-along rights

In this article, we examine tag-along and drag-along rights, and how they respectively benefit majority shareholders and minority shareholders in joint venture scenarios, when each are faced with exiting that joint venture and selling their shares to a third party acquiror. Often regarded as a fundamental mechanism in joint venture agreements, tag-along rights and drag-along rights can have important ramifications in joint-venture scenarios, and are often a hot topic of negotiation in a majority/minority joint venture shareholding dynamic.

What are drag-along rights?

A drag-along right allows majority shareholders to compel minority shareholders to sell their shares alongside the majority when a company is sold (typically on the same terms and conditions). This mechanic ensures that a buyer of a majority stake can go on to acquire 100% of the company, meaning a majority seller is more readily able to achieve an exit.

Why does this matter?

Buyers of stakes in corporate entities (e.g. companies, partnerships, unit trusts) often want full control. Without drag-along rights, a buyer could be forced to partner with a minority shareholder or a minority seller could demand extra benefits to agree to sell its stake.

Key features of drag-along rights

Clean Exits: Majority shareholders can deliver the entire company to a buyer.

Equal Treatment: Minority shareholders normally receive the same price and terms as the majority shareholder (although this is up for negotiation, normally in the relevant company’s articles of association) save that ‘dragged’ minority shareholders will often insist that they not be required to provide contractual protections to buyers in the form of warranties (save for limited fundamental matters such as ownership and no encumbrances).

Negotiation levers

Thresholds: A key for drag-along rights is balance. Ownership thresholds can make the requirement clear and fair, meaning that the majority shareholder can act decisively but still have regard to minority protections. The threshold for majority shareholders for whom drag-along rights apply is usually set at somewhere between 66% to 75% of the total shareholding, although this can be lower depending on the specific structure and bargaining power of the parties.

Valuation rules: The price for the shares of the minority shareholder will typically be the same per share as applies for the majority shareholder.

Right of First Offer (“ROFO”): Commonly included in shareholders’ agreements, a ROFO (also known as a pre-emption right on transfer) gives existing shareholders the first opportunity to purchase shares of a selling co-shareholder before they are offered to an external buyer.

Costs: Minority shareholders who are ‘dragged’ into a transaction will often look to the majority shareholder or the third-party buyer to be responsible for their costs of sale,

Power of attorney: Drag-along provisions often include a power of attorney from the dragged’ minority shareholders allowing for transaction documents to be executed on their behalf‘. 

Example

Consider a joint venture structured as a private limited company established in the UK, where a majority shareholder holds 75% of the JV’s shares and a minority shareholder holds 25% of the JV’s shares. If the third-party buyer offers to purchase the majority JV shareholder’s shares, that majority JV shareholder can “drag” the minority JV shareholder along, ensuring the third-party buyer gets full ownership.

The tag-along counterbalance

If drag-along protects the majority, tag-along rights protect the minority. These rights, allow minority shareholders to “tag-along” and sell their shares on the same terms if the majority decides to sell. This ensures they are not left behind with a new controlling shareholder they did not choose and gives them a fair exit opportunity.

Unlike a ROFO – which, depending on a company’s shareholders’ agreement, can give existing shareholders the first opportunity to purchase shares being transferred, tag-along rights do not require the minority to find the funds to purchase someone else’s stake. Instead, they simply allow the minority to sell their own shares alongside the majority.

In practice, tag-along rights are rarely exercised in full because most buyers prefer to acquire 100% of the company. However, they remain an important safeguard for minority investors.

Key features of tag-along rights

Scope of application: Tag-along rights are a provision in a shareholders’ agreement designed to protect minority shareholders. When a majority shareholder decides to sell their stake, tag-along rights allow minority shareholders to “tag along” and sell their minority stake under the same terms and conditions. This provides an opportunity for minority shareholders to exit the company when a significant ownership shift happens, ensuring they are not left with new, possibly unfavourable, majority shareholders.

Notice and timing: The agreement should set out how much notice the majority must give and how long the minority has to decide whether to participate, as well as what happens in the case of no response being given – usually taken as non-participation.

Execution mechanics: Clear steps for transferring shares, coordinating with the majority and ensuring completion on the same terms and conditions.

Carve-outs: Common exceptions include ‘Permitted Transfers’ (e.g., within a corporate group in the case of a corporate shareholder or to family members in the case of an individual shareholder), which do not trigger tag-along rights.

Costs: Minority shareholders who ‘tag along’ will typically be required to bear their pro rata proportion of transaction costs.

Example

If a JV’s majority shareholder wants to sell its 75% interest to a third-party buyer, the minority JV shareholders can “tag along” and sell their 25% stake too, ensuring they benefit from the same price per share and terms as the majority shareholder.

Why these clauses matter

Conclusion and our experience

Tag-along and drag-along rights are the backbone of a fair and efficient exit plan in real estate joint venture companies. They protect minority shareholders from being left with a partner they did not choose and ensure the majority can act to secure an exit when opportunities arise.

Burges Salmon’s Corporate Real Estate team have in depth experience in drafting and negotiating tag-along and drag-along rights in joint venture agreements.

With a team of Built Environment lawyers qualified across England, Wales, Scotland and Northern Ireland, we support clients on real estate matters across jurisdictions and project types. Our Corporate Real Estate team works closely with colleagues in construction, planning, tax, litigation, environmental and finance to provide integrated support throughout the lifecycle of real estate assets.

We have experience across many sectors including logistics, hospitality, office, residential (including build-to-rent and student accommodation), and large-scale regeneration schemes.

If you would like to explore any of the topics discussed above, please contact Jonathan Cantor (Partner, Corporate and M&A) Oli Gingell (Senior Associate, Corporate and M&A) and Shaaf Alam (Solicitor, Corporate and M&A).