Introduction
When you’re building a company with multiple shareholders — whether it’s a tech startup in Silicon Valley, a private equity deal in London, a venture-backed business in Singapore, or a family-run company in Dubai — one question eventually surfaces: what happens when someone wants to exit?
Can majority shareholders force a complete sale? Can minority investors be left behind with an unfamiliar new owner? These aren’t hypothetical concerns. They’re real scenarios that play out in boardrooms worldwide, and the answers lie in two critical provisions found in shareholders agreements: tag-along and drag-along rights.
Drag-along and tag-along rights are common provisions typically included in shareholders’ agreements designed to protect the interests of both minority and majority shareholders in the event of a sale. Understanding these rights is essential for anyone holding equity, from founders and angel investors to institutional VCs and family shareholders.
This guide explains what these rights are, how they work across different jurisdictions, their advantages and disadvantages, and critical legal considerations for enforcement.
What Are Drag-Along Rights?
Drag-along rights (sometimes referred to as ‘come along’ or ‘bring along’ rights) principally enable a majority shareholder to force minority shareholders to also sell their shares in the company, guaranteeing that the majority can deliver 100% of the share capital to a bona fide third-party purchaser.
How Drag-Along Rights Work
In the event of a sale of a controlling interest by the shareholder(s) holding a specified majority of shares, a drag-along right enables the selling majority shareholder to procure an exit by forcing the remaining minority shareholders to similarly sell their shares to a third-party purchaser on broadly the same terms.
Here’s a practical example:
Company ABC has four shareholders: Sarah owns 51%, Michael owns 25%, and two angel investors each hold 12%. A buyer approaches wanting to acquire 100% of the company. Sarah agrees to sell at a premium valuation. Michael and the angels are hesitant. If a drag-along provision exists with a 51% threshold, Sarah can compel all other shareholders to sell their shares on the same terms and price she negotiated.
A minimum ownership percentage of 51% can vote to trigger a drag-along sale, however, the exact ownership percentage can vary depending on the ownership mix and the bargaining strength of shareholders. The threshold is usually around 75% but can be lower depending on the structure and bargaining power of the parties.
Why Drag-Along Rights Matter
Some buyers want complete control of a company, and drag-along rights empower them to eliminate minority shareholdings while ensuring the sale of the company is not obstructed by minority shareholders. From the perspective of the majority shareholder, a drag-along right increases the marketability of the business by delivering a target company with no minority interests, and potentially secures a higher “premium for control” share valuation.
Most institutional buyers, private equity firms, and strategic acquirers won’t proceed with an acquisition if they can’t secure 100% ownership. Drag-along rights make that possible.
What Are Tag-Along Rights?
Tag-along rights (sometimes referred to as ‘co-sale rights’ or ‘piggyback rights’) are provisions typically used to protect minority shareholders, allowing them to join in on a sale of shares by a majority shareholder and sell their shares on the same terms at the same price.
How Tag-Along Rights Work
Using the previous example: if Sarah (51% majority holder) sells her controlling stake to a strategic buyer at a premium price per share, the tag-along provision gives Michael and the angel investors the right to also sell their shares to that same buyer at that same price and under the same conditions.
Tag-along rights allow the minority shareholders to require the majority shareholders to procure an offer for the sale of the minority shareholders’ own shares on the same terms. The key difference? Tag-along rights do not oblige minority shareholders to sell — the right is optional. They can choose to join the sale or remain invested.
Why Tag-Along Rights Matter
Tag-along rights provide a secure exit strategy for minority shareholders and ensure they aren’t left behind in the event a major shareholder decides to exit the venture. In the absence of tag-along rights, minority shareholders run the risk of being left behind when the majority shareholder liquidates its investment and consequently being locked in with a new and unfamiliar partner.
Without these rights, minority shareholders could find themselves stuck with new owners they didn’t choose, facing reduced influence, changed business direction, or difficulty selling their minority stake later.
Key Differences Between Drag-Along and Tag-Along Rights
| Feature | Drag-Along Rights | Tag-Along Rights |
|---|---|---|
| Primary beneficiary | Majority shareholders | Minority shareholders |
| Nature of obligation | Mandatory — forces minority to sell | Optional — minority chooses whether to join |
| Purpose | Facilitates complete sale of company | Protects minority from being left behind |
| Control | Majority controls the exit | Minority gets to participate in majority’s exit |
| Buyer appeal | Enables 100% acquisition | Doesn’t affect buyer’s ability to acquire control |
Legal Framework Across Global Jurisdictions
United States (Delaware and Other States)
In Delaware, the type of notice that majority owners issue to minority shareholders was the subject of a ruling in Halpin v. Riverstone National, Inc. at the Delaware Court of Chancery on February 26, 2015, where the judge held that the drag-along right was not enforceable because the majority owners failed to comply with the drag-along sale provisions — they only notified the minority owners after the sale had occurred when the governing agreement required advance notice.
This case establishes a critical principle: procedural compliance matters. In the US, drag and tag rights are contractual, not statutory, and courts will enforce them strictly according to the written terms.
United Kingdom
In most jurisdictions including the UK, drag-along and tag-along rights are not statutory rights and will need to be included in the shareholders agreement or articles of association of the company. The provisions will typically specify the percentage of shareholders required for triggering the drag-along right.
UK shareholders agreements commonly include both provisions as standard, particularly in venture capital and private equity transactions. The threshold for drag-along is typically negotiated between 51% and 75%.
Australia
In Australia, drag-along and tag-along rights are not implied by law or included by default — if you want them, you need to put them in a binding document such as a Shareholders Agreement or Company Constitution adopted by special resolution.
A Constitution adopted by special resolution binds all shareholders, providing enforceability against current and future shareholders without requiring individual signatures on a separate shareholders agreement.
Singapore
Drag-along rights favour the majority shareholder while tag-along rights are more beneficial to the minority shareholder, and when negotiating such clauses, the salient points serve as useful reference points and negotiation tools which could make a significant difference to a shareholder’s return on investment.
Singapore follows similar principles to UK law, with these provisions being contractual and commonly included in private company shareholders agreements, particularly in VC and PE deals.
India
While India doesn’t have specific statutory provisions for drag/tag rights, courts have recognized their enforceability through several landmark judgments. The Supreme Court in Vodafone International Holdings BV v. Union of India (2012) held that parties must abide by drag-along and tag-along rights even if not explicitly mentioned in a company’s Articles of Association, establishing their contractual validity.
United Arab Emirates (UAE/Dubai)
In the UAE, particularly in free zones like DIFC and ADGM, shareholders agreements with drag and tag provisions are recognized and enforceable as contracts between parties. These provisions are especially common in joint ventures and foreign-invested companies operating in free zones.
The Universal Principle
Across all jurisdictions, the common thread is this: drag-along and tag-along rights are contractual mechanisms, not statutory entitlements. They must be explicitly documented in shareholders agreements or constitutional documents to be enforceable.
Critical Negotiation Points and Considerations
When drafting or negotiating drag-along and tag-along provisions, several critical issues must be addressed:
1. Threshold Percentage
What constitutes a majority for determining when drag-along rights may be exercised — is it 51%, 66%, 75%, or another threshold? This is often the most heavily negotiated term.
2. Form of Consideration
In most cases, drag-along rights may only be invoked by the majority shareholder where the transfer is for cash consideration — minority shareholders are likely to object to drag-along rights for non-cash consideration like share-for-share exchanges, as they may be left with a minority stake in another company with limited rights and no exit route.
It is vital that the drag-along provision clearly sets out whether non-cash consideration is permitted.
3. Minimum Price Protection
Minority shareholders may, if in a strong negotiating position, insist on a minimum price level to avoid being dragged at an undervalue — for instance, if the majority shareholder goes insolvent and has assets sold on a “fire sale” basis
4. Representations and Warranties
Minority shareholders subject to a drag-along right should not, and are typically not expected to, give representations and warranties other than as to capacity and title, since they have no control over the warranty package agreed by the selling majority shareholder.
5. Pre-Emption Rights Interaction
Pre-emption rights will usually take precedence where an agreement is silent on the interrelationship between a drag-along right and a pre-emption right — it is important to ensure this is addressed to allow the majority shareholder the ability to negotiate with the purchaser.
6. Notice Periods and Procedures
The amount of time shareholders have to exercise their drag-along rights or to respond to a drag-along notice should be agreed to ensure timeframes are achievable and advance notice requirements must be clearly specified and complied with.
7. Tag-Along Trigger
Are tag-along rights triggered if the majority shareholder decides to sell part of its shareholding but not all, or only when selling its whole shareholding? This determines whether partial sales by the majority trigger minority participation rights.
8. Pro-Rata Participation
When tag-along is exercised, how is allocation handled if the buyer has a purchase limit? The standard approach is pro-rata allocation based on shareholding percentages.
How My Legal Pal Can Help
Drafting shareholders agreements with properly structured drag-along and tag-along provisions isn’t something you want to leave to generic templates or guesswork. These clauses define how exit scenarios unfold, and poorly drafted provisions can lead to disputes, unenforceable rights, or unfair outcomes.
At My Legal Pal, we connect you with experienced corporate and commercial lawyers who draft shareholders agreements tailored to your jurisdiction, shareholding structure, and business needs. Whether you’re a startup raising your first round, a family business bringing in external investors, or a company planning for future exits, our advocates ensure your drag and tag provisions are clear, enforceable, and balanced.
Get Your Shareholders Agreement Drafted by Expert Contract Lawyers of My Legal Pal
Frequently Asked Questions
Q1. What is the difference between drag-along and tag-along rights?
Drag-along rights allow majority shareholders to force minority shareholders to sell their shares during a company sale, ensuring 100% acquisition. Tag-along rights allow minority shareholders to optionally join a sale initiated by majority shareholders on the same terms, protecting them from being left behind.
Q2. Are drag-along and tag-along rights legally mandatory?
No. In most jurisdictions including the USA, UK, Australia, Singapore, UAE, and India, these rights are contractual, not statutory. They must be explicitly included in shareholders agreements or articles of association to be enforceable.
Q3. What percentage is typically required to trigger drag-along rights?
The threshold varies based on negotiation and jurisdiction but commonly ranges from 51% to 75%. The exact percentage should be clearly specified in the shareholders agreement.
Q4. Can drag-along rights apply to non-cash consideration like share swaps?
Generally, drag-along provisions are drafted for cash consideration only. Minority shareholders typically resist drag provisions that include non-cash deals (like share-for-share exchanges) because they could be left with illiquid minority stakes in unfamiliar companies. Any non-cash provisions must be explicitly stated.
Q5. Can minority shareholders set a minimum price in drag-along provisions?
Yes. Minority shareholders in strong negotiating positions often include minimum price floors or independent valuation requirements to protect against fire sales or undervalued transactions forced by distressed majority shareholders.
Q6. Do tag-along rights apply to partial sales of shares?
This depends on how the provision is drafted. Some tag-along clauses only trigger when the majority sells their entire stake, while others apply to any sale above a certain threshold. This should be clearly specified in the agreement.
Q7. What happens if a shareholder refuses to comply with drag-along rights?
If drag-along provisions are properly drafted and notice procedures followed, the refusing shareholder is contractually bound to sell. The agreement may include enforcement mechanisms allowing the majority to execute documents on behalf of non-compliant shareholders or specific performance remedies.
Q8. Where should drag-along and tag-along rights be documented?
These rights should be included in either the shareholders agreement (signed by all shareholders) or the company’s articles of association/constitution. In some jurisdictions like Australia, including them in a constitution adopted by special resolution ensures they bind all current and future shareholders.
Q9. Can founders protect themselves from unfavorable drag-along rights?
Yes. Founders can negotiate for higher thresholds (e.g., 75% instead of 51%), minimum price protections, restrictions on non-cash consideration, longer notice periods, and carve-outs for certain types of buyers.
Q10. Do these rights expire or have time limits?
Typically, these rights remain in effect for as long as the shareholders agreement is in force and the shareholding thresholds are met. Some agreements may include sunset clauses or restrictions that limit drag/tag rights after certain milestones or time periods.
Final Thoughts
Drag-along and tag-along rights are fundamental mechanisms that balance the interests of majority and minority shareholders during company exits. Whether you’re operating in the USA, UK, India, Australia, Singapore, UAE, or elsewhere, these provisions create clarity, reduce disputes, and enable smooth ownership transitions.
The key is getting them right from the start. Properly drafted drag and tag clauses protect everyone — majority shareholders get the flexibility to exit when opportunities arise, minority shareholders get fair treatment and exit options, and buyers get the certainty they need to complete transactions.
Don’t rely on generic templates or outdated provisions. Work with legal professionals who understand your jurisdiction’s requirements and can craft balanced, enforceable provisions tailored to your company’s unique shareholding structure.
Your shareholders agreement is the foundation of your exit strategy. Make sure it’s built to last.
Connect with Corporate Law Experts Today at My Legal Pal
