When selling company shares, two clauses often decide success or failure: drag-along and tag-along. Both govern what happens when a shareholder wants to sell. Anyone signing a shareholders' agreement should understand these terms precisely, as they shift the balance of power considerably.
What is a drag-along clause?
The drag-along clause gives a majority shareholder the right to force minority shareholders to join a sale. If a buyer is found for the entire company, the minority must sell on the same terms. This is attractive for buyers because they can acquire one hundred percent without individual shareholders blocking.
What is a tag-along clause?
The tag-along clause is the mirror image and protects minority shareholders: if the majority sells, the minority may sell along on the same terms. This prevents the majority from taking an attractive deal alone and leaving the minority with a new, possibly unwelcome majority owner.
Why both clauses belong together
Drag-along and tag-along are two sides of the same coin. A balanced shareholders' agreement usually contains both. This creates fairness and predictability and makes the company more attractive to investors.
The interplay with vinculation
Closely linked is vinculation, the requirement of consent for transferring shares. Drag-along and tag-along clauses must be carefully aligned with vinculation, otherwise contradictions can paralyse the whole sale process. For a planned stake sale, careful review pays off.
FAQ
Can I prevent a drag-along as a minority shareholder? Only through negotiation before signing. High majority thresholds and minimum-price clauses help.
Does tag-along apply automatically? No, it must be expressly set out in the shareholders' agreement.
Are these clauses common in Germany? Yes, especially with investors or several shareholders, they are standard in professional contracts.