What is Drag Along?

What is Drag Along? | Izmir Start-up Lawyer

What is Drag Along?

“azınlık hissedarının, çoğunluk hissedarı tarafından bir şirketin satışına katılmaya zorlanmasını sağlayan sözleşme hükmü”

Mergers, acquisitions, and investment processes in companies can be quite complex and technical. In these processes, we want to discuss the concept of "Drag Along," which is frequently encountered by those new to startups and investment. Essentially, "Drag Along" is a regulation in shareholder agreements (SHAs) that protects the rights of company owners against minority shareholders.

Drag-along arrangements are designed to compel other shareholders to sell their shares under similar conditions if a portion of the company's shares are sold to third parties.

The drag-along arrangement is important for many company sales because buyers often seek complete control of a company. In short, the aim of the drag-along arrangement is to prevent minority shareholders from blocking the sale of rapidly growing startups when large companies want to acquire them entirely with a good offer. Many companies looking to take over a company may not always be welcoming to minority shareholders who might accompany them; therefore, the goal is to avoid hindering exit processes.

Benefits of Drag Along Arrangements for Minority Owners

Especially in large companies, while the drag-along right aims to restrict the rights of minority shareholders in the company, it can also lead to the sale of minority shares under high-priced conditions, particularly when the company is sold at a high price; even if shares could otherwise be sold at a relatively low price, it can become a more advantageous situation.

Differences Between Drag Along and Tag Along Arrangements

The concept of "tag along," which means labeling, is frequently encountered in merger and acquisition processes, often in conjunction with drag along arrangements. While sharing similar underlying structures, tag along clauses, which foresee different regulations, are generally designed to protect minority rights holders. In this respect, they can be considered the opposite of drag along arrangements.

Tag-along arrangements offer minority shareholders the option to sell, but do not impose any obligation. Failure to follow a tag-along arrangement during the company's sale process may result in invalidity.

For legal advice on this matter, please contact our expert team. Contact page.

Here are some other works that might interest you:

Izmir Commercial Lawyer

Address: Nergis Neighborhood, Girne Boulevard No: 83, Floor 2, Apartment 2, Karşıyaka, İzmir

E-mail: info@efeshukuk.com

Phone: +90 534 415 52 56