Reading time: 5 minutes

A shareholders agreement is a written contract between the shareholders of a company. These agreements typically include funding, structural, management and strategic clauses relating to the company. A well-drafted shareholders agreement will also include a ‘drag along’ provision. This article will explain some key things to know about drag along rights, including their importance and impact on minority shareholders. 

What Is a Drag Along Right?

A drag along right is a term you may find in your shareholders agreement. The term drag along right stems from the notion that majority shareholders will ‘drag’ minority shareholders against their will to sell their shares with the majority.

Likewise, a drag along right allows a majority of shareholders to force minority shareholders to sell the company to a third party. The shareholders agreement will often specify the majority required to invoke a drag along right. Typically, this will range between a 51% and 90% majority.

Aside from majority shareholders forcing the minority to sell their shares, drag along rights do not have any other disadvantages for the minority shareholders. Indeed, minority shareholders still receive an equal sale price and benefit from the same terms and conditions as the majority.

Why Are Drag Along Rights Important?

Drag along rights are important in the sale of the business or mergers and acquisitions. This is because companies looking to purchase a business will usually want it entirely, rather than purchasing it with minority shareholders. 

If you do not include drag along rights in your shareholders agreement, it will be difficult for majority shareholders to sell the company. This is because the minority will have the power to block the acquisition of the company, even when the vast majority agree with one another.

Depending on who is the majority shareholder, the benefits of these rights will vary. 

For example, consider you are the director of a startup seeking investment from a venture capitalist. If you retain the majority of shares in your company, you will be protected in the instance of an eventual sale, ensuring that investors must to adhere to your sale terms and sell their shares.

Are Drag Along Rights Oppressive?

While drag along rights might appear oppressive to minority shareholders, this is not usually the case. Typically, shareholders will agree to a drag along provision when signing a shareholders agreement. Hence, if a minority shareholder’s wishes are overpowered and drag along rights are invoked, minority shareholders are not considered oppressed.

Importantly, a drag along right will not be oppressive if you draft and execute it correctly.

Additionally, only in limited circumstances will the law consider the execution of drag along rights as oppressive. For example, a Court may find a drag along right to be oppressive if the company’s affairs are discriminatory. Alternatively, the company conducted business in a way that is contrary to the interests of the shareholders as a whole. In that case, the minority shareholders can seek remedies under the Corporations Act.

Important Considerations

Further, when negotiating drag along rights in your shareholders agreement, you should consider a few key elements. 

Consideration

In many cases, drag along rights are only triggered when transferring to a third-party purchaser for a price. However, some shareholders agreements will apply to transfers without a price (such as in the case of mergers). This type of provision will often lead to resistance from the minority. Therefore, when preparing a shareholders agreement, the best way to draft the provision should be considered.

Price

Minority shareholders may wish to include a provision that values their shares to ensure they have been priced above the minimum cost. You should include methods for determining this price in the shareholders agreement.

What Are Tag Along Rights?

Tag along rights’ is a commonly heard phrase alongside drag along rights. Also referred to as co-sale rights, tag along rights are the opposite of drag along rights. When majority shareholders sell their shares, tag along rights enable the minority shareholders to sell their shares simultaneously. Likewise, the sale will be under the same conditions as the majority. In addition, tag along rights encourage investors to buy into a company in its early stages, helping raise capital for startups.

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.

Download Now

Key Takeaways

Drag along rights give majority shareholders the ability to sell a company to a third party without minority shareholders’ consent. They are important in the sale of the business or mergers and acquisitions. In particular, including drag along rights in your shareholders agreement can be beneficial for the minority shareholders.

If you need help with understanding your rights as a shareholder, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a drag along right?

A drag along right is a term you may find in your shareholders agreements. The term stems from the notion that the minority shareholders are being ‘dragged’ against their will to sell their shares with the majority.

Why are drag along rights important?

Drag along rights are important in selling a company to a third party or in mergers and acquisitions. Companies looking to purchase a business will usually want it entirely rather than purchasing the company with minority shareholders. 

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards