Drag along and tag along rights control what happens to shares during a company sale – and they can significantly affect a shareholder's position by directly influencing their ability to participate in (or resist) a company sale.
If you’re looking for these clauses, the first place to look is a company’s articles of association. But if they’re using Model Articles, which is the default for most companies when they incorporate, you won’t find them (more on that shortly).
Drag along rights put majority shareholders in the driver’s seat, allowing them to sell the company and take everyone along for the ride. It’s their way of saying, “We’re selling, and so are you.” They benefit the majority by preventing deadlock and ensuring that deals go through.
Tag along rights, on the other hand, are a safety net for minority shareholders. If the majority shareholders sell their shares, tag along rights let minority shareholders sell under the same conditions. They protect the minority from being sidelined or left with diminished value.
As ever, there’s a little more to it than that! Read on to explore how these rights affect both companies and shareholders and how they can affect how a company is sold.
Drag and tag along rights are specifically designed to manage what happens to shareholders during a company sale.
Whether you’re in the majority or the minority, these rights directly affect how your shares are treated when the company changes hands.
Drag along rights come into play when the majority shareholders (usually those holding over 50% of the shares collectively) want to sell the company. They allow the majority to compel the minority shareholders to sell their shares too.
Why is this important? Well, imagine the majority gets a great offer from a buyer, but a minority shareholder is holding out for a better deal. Without drag along rights, this shareholder could block the sale, causing everyone to miss out.
Here's an example: let's say a company has 100 shares, with ownership split like this:
Shareholder A: 60 shares (60%)
Shareholder B: 20 shares (20%)
Shareholder C: 20 shares (20%)
If Shareholder A wants to accept an offer to sell the company, they need B and C on board. But if either B or C refuses to sell, they could derail the deal.
However, if the shareholders' agreement has a drag along clause requiring all shareholders to sell if the majority (in this case, 50%+) wants to, then A can compel B and C to participate, preventing a single shareholder from blocking the sale.
Tag along rights are designed to protect minority shareholders by giving them the opportunity to sell their shares at the same price and under the same terms as the majority shareholders.
The process typically works like this:
The key point is that tag along rights ensure minority shareholders have the same opportunity as the majority to sell their shares at the negotiated price.
They prevent a situation where the majority could sell their shares at a premium, leaving the minority shareholders with less valuable shares or forcing them to sell at a lower price later.
Here's a simple example:
If Shareholder A negotiates to sell their shares at £10 each, Shareholders B and C have the right to sell their shares at £10 each too. If they exercise this right, the buyer must purchase their shares at that price.
However, if B and C decide not to sell, they can keep their shares. The buyer would only purchase A's shares in this case.
So, tag along rights don't force a buyer to purchase all shares. Instead, they ensure that if minority shareholders want to sell, they can do so at the same price and terms as the majority.
It's about fairness and equal opportunity, not an obligation for the buyer to acquire all shares.
When you're reviewing a company’s articles of association, pay close attention to the details of the drag and tag along clauses.
Here are four key points to evaluate:
Look for the percentage of shareholder approval that's required to trigger the drag along right. This is usually set at a level that gives the majority shareholders the power to force a sale, but it's important to know exactly what that threshold is.
Check if any provisions ensure the sale price is fair and reasonable. For example, the articles might require an independent valuation to determine the fair market value of the shares.
Be aware of any warranties or indemnities that you, as a shareholder, might be required to provide to the buyer. These are legal promises about the company's state and can create potential liabilities for shareholders.
Make sure you understand how much notice you'll be given before a sale is finalised. This will affect how much time you have to review the terms of the sale and make decisions about your shares.
By familiarising yourself with these key aspects of the drag and tag along clauses, you'll be better prepared to protect your interests in the event of a sale.
When companies incorporate, they typically adopt the standard Model articles of association by default—these are the default rules provided by Companies House. However, Model Articles do not include drag and tag rights.
To prepare for events like bringing in investors, issuing share options or expanding employee ownership, companies often add these rights by adopting custom articles of association.
Doing so early helps keep the company sale-ready and prevents potential roadblocks during an exit.
If you choose Vestd’s standard articles of association, drag and tag along rights come built in, ensuring your company is prepared for a future sale – whenever that may be!
When companies grant share options (like EMI options), they are effectively creating potential future shareholders who will exercise their options to acquire shares.
If the options are 'exit only', meaning you can only exercise them when the company is sold, drag and tag rights don't directly affect you – you'll simply have the right to exercise your options at the point of sale and immediately sell your shares as part of the transaction.
However, if you have exercisable options (where you can turn options into shares before a sale), drag and tag rights become very important. Once you exercise your options and become a shareholder, these rights will apply to your shares.
That's why companies usually make sure they have drag and tag provisions in their articles before allowing options to be exercised - a large number of small shareholders without drag along rights could obstruct an exit, making the company less attractive.
That’s going to put future investors off, as they’ll want to see a clear path to liquidity and a potential exit.
On the flip side of the coin, tag along rights benefit option holders by allowing them to sell their shares on the same terms as the majority. They protect the opportunity to realise value during a sale.
As companies grow and share ownership becomes more complex, having clear rules about company sales becomes essential.
Whether you're bringing in investors, offering employees shares, or planning a future exit, drag and tag along rights help create a framework that works for everyone.
Without them, companies can find themselves stuck in the mud, unable to complete sales because of shareholder disagreements, or facing disputes about fair treatment during exits.
That's why many companies add these protections to their articles of association early on.
Vestd's articles include both drag and tag along rights, giving you a balanced framework that protects all shareholders while keeping your company sellable.
Our platform then helps you manage everything else about share ownership:
Whether you're just starting to share ownership or managing an existing scheme, having the right protections in place matters.
Want to see how Vestd can help you manage shares effectively? Book a free chat with our team.