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Drag-Along Rights

Drag-Along Rights

What Are Drag-Along Rights?

A drag-along right is a provision or clause in an agreement that enables a majority shareholder to force a minority shareholder to participate in the sale of a company. The majority owner doing the dragging must give the minority shareholder similar price, terms, and conditions as some other seller.

Figuring out Drag-Along Rights

Share offerings, mergers, acquisitions, and takeovers can be muddled transactions. Certain rights might be incorporated and instituted with the terms of a share class offering or in a merger or acquisition agreement.

The drag-along provision itself is important to the sale of many companies since buyers are much of the time searching for complete control of a company. Drag-along rights help to take out the current minority owners and sell 100% of a company's securities to a likely buyer.

While drag-along rights themselves might be obviously point by point in an agreement, differentiation among majority and minority might be something to keep an eye out for. Companies can have various types of share classes. A company's local laws will mean the ownership and voting rights that shareholders have, which might have suggestions on majority versus minority.

Contemplations for Drag-Along Right Provisions

Drag-along rights can be instituted through capital raising money or during merger and acquisition talks. In the event that, for instance, a technology startup opens a Series An investment round, it does as such to sell ownership of the company to a venture capital firm in return for capital imbuement. In this specific model, majority ownership dwells with the chief executive officer (CEO) of the company who possesses 51% of the firm's shares. The CEO needs to keep up with majority control and furthermore needs to safeguard himself on account of an inevitable sale. To do as such, he arranges a drag-along right with the share offering to a venture capital firm, giving him the right to force the venture capital firm to sell its interest in the company on the off chance that a buyer at any point introduces itself.

This provision forestalls any future situation where a minority shareholder may in any capacity have the option to subvert the sale of a company that was at that point approved by the majority shareholder or a collective majority of existing shareholders. It additionally abandons no shares of the acquired company in the hands of previous shareholders.

At times, drag-along rights might be more famous in agreements including private companies. Drag-along rights from privately held shares may likewise end when a company opens up to the world about another share offering agreement. An initial public offering of share classes will normally invalidate previous ownership agreements and institute new drag-along rights if applicable for future shareholders.

Benefits of Drag-Along Rights for Minority Shareholders

While drag-along rights are intended to relieve minority shareholder effects, they can be beneficial for minority shareholders. This type of provision expects that the price, terms, and conditions of a share sale be homogeneous across the board, meaning small equity holders can understand favorable sales terms that might be generally unattainable.

Ordinarily, drag-along right provisions command an orderly chain of communication to the minority shareholders. This gives advance notice of the corporate action ordered for the minority shareholder. It likewise gives communication on the price, terms, and conditions that will apply to the shares held by the minority shareholders. Drag-along rights can be invalidated on the off chance that the appropriate procedures surrounding their enaction are not followed.

Drag-Along Rights versus Tag-Along Rights

Tag-along rights vary from drag-along rights, however they have a similar underlying concentration. Tag-along rights also might be found in share offerings as well as merger and acquisition agreements. Tag-along rights offer minority shareholders the option to sell yet don't command an obligation. If tag-along rights exist, it can have various ramifications for the terms of a merger or acquisition than would be examined with drag-along rights.

Certifiable Example

In 2019, Bristol-Myers Squibb Company and Celgene Corporation went into a merger agreement under which Bristol-Myers Squibb acquired Celgene in a cash and stock transaction valued at roughly $74 billion. Post-acquisition, Bristol-Myers Squibb represented 69% of shares for the combined entity and changed over Celgene shareholders represented the excess 31%. Celgene's minority shareholders were not permitted any special options and were required to consent to the receipt of one Bristol-Myers share and $50 for each Celgene share owned.

In this deal, the Celgene shares were delisted. The minority shareholders were required to follow the terms of the deal and were not eligible for special contemplations. Had Celgene's shares not been delisted, drag-along and tag-along rights might have become to a greater extent a factor. In certain situations, for example, this, majority shareholders might arrange special share rights under an alternative class structure that may not be available to minority shareholders due to the ramifications of drag-along rights.

Features

  • Drag-along rights might be incorporated and instituted with the terms of a share class offering or in a merger or acquisition agreement.
  • Tag-along rights vary from drag-along rights since tag-along rights offer the minority shareholders the option to sell yet don't command an obligation.
  • Drag-along rights kill the current minority shareholders through the sale of 100% of a company's securities to an expected buyer.