Tag along rights explained: how minority shareholders join a sale, and the pros and cons

What are tag along rights, how do they work, and should you include them in your company's documents? In short, tag along rights protect minority shareholders when the majority decides to sell. They give the minority the right to join the sale on the same terms, and if the buyer will not take their shares too, the majority cannot sell. Whether you want them depends on whether you are the minority looking for protection or the majority looking for a clean exit.

What are tag along rights?

Tag along rights are contractual provisions, usually found in a shareholders' agreement or in the company's articles of association, that aim to protect minority shareholders when the majority shareholders have been offered a deal to sell their shares to a third-party buyer.

The mechanism is simple. When the majority receives an offer, the minority shareholders can "tag along" and request that the buyer also offers to buy their shares on the same terms as the majority. They would like to join the sale and exit alongside the majority at the same price.

If the buyer is unwilling to buy the minority's shares on those terms, the majority shareholders are prohibited from selling their shares to that buyer. That is the teeth of the provision. The majority cannot simply take the offer and leave the minority behind.

A short example. Suppose you hold a small stake in a private company and the founder, who holds the majority, is approached by a buyer. Without a tag along right, the founder can sell their shares, take the money and leave you as a minority shareholder in a company now controlled by someone you have never met. With a tag along right, you can require that the buyer offers to buy your shares on the same terms. If the buyer will not, the founder cannot sell.

Because these rights are contractual, they only exist if they have been written into the documents. A minority shareholder in a company whose shareholders' agreement and articles are silent on the point has no tag along right to rely on.

Tag along vs drag along rights

Tag along rights are often discussed alongside their sister provision, drag along rights, and it is easy to mix them up.

Drag along rights work the other way round. In short, they enable majority shareholders to force minority shareholders to sell their shares to a third-party buyer. So tag along provisions are exercised by minority shareholders, who can choose to join a sale if they want to, whereas drag along provisions are exercised by majority shareholders, who force the minority to sell to the buyer.

There are three key differences between the two:

• Who benefits. Tag along rights benefit minority shareholders. Drag along rights benefit majority shareholders.
• Option versus obligation. Tag along rights give minority shareholders the option to sell their shares to a buyer. Drag along provisions force minority shareholders to sell their shares to that buyer.
• Purpose. Tag along rights exist to avoid minority shareholders being left behind with a stranger as their new majority shareholder. Drag along rights exist so that a potential business sale is not put at risk, because a buyer of a business usually wants to buy all of the shares in the company, not just those held by the majority.

The two provisions address the same event, a sale of the majority's shares to an outsider, from opposite sides. One gives the minority a way in; the other gives the majority a way to bring the minority with them. Many shareholders' agreements contain both, so that each side has protection. For the majority-shareholder view, there is a separate page on drag along rights.

Advantages of tag along rights

There are three main advantages, and the first two are really about the minority shareholder's position.

• The minority is not left behind. A minority shareholder is not stuck in a company with a stranger as the new majority shareholder, someone they did not choose and may not want to be in business with. That is the big one.
• A more likely exit. Minority shareholders are much more likely to be able to exit their investment and sell their shares to a buyer. Without a tag along right, a minority stake in a private company can be very hard to sell on its own. With one, the minority rides the majority's deal.
• Easier to attract equity investors. The company itself typically has an easier time attracting equity investors if it includes tag along provisions in its documents. An investor taking a minority stake wants to know they will not be stranded, and a tag along right answers that concern before it is raised.

Disadvantages of tag along rights

As with any protection, there is a cost, and the cost falls mainly on the majority.

• Complexity and compliance costs. Tag along rights add complexity to the documents and to any sale. Certain procedures need to be followed when the right is triggered, and these are usually carried out by solicitors, which means professional fees.
• They can jeopardise the majority's sale. This is the big disadvantage for majority shareholders. If the buyer only wants the majority's shares, and the only way to get them is to also buy the minority's shares under the tag along provisions, the buyer may step away and say they are not buying any shares at all. The minority's protection becomes the majority's obstacle.
• A lower price per share. Tag along rights may lower the price per share a buyer is willing to pay, because the total purchase price for the business has to be shared among both the minority and the majority shareholders rather than going to the majority alone.

Should you include tag along rights?

That is how tag along rights work in practice. In my experience, whether to include them comes down to who you are. If you are investing for a minority stake, or you are a founder who may end up as the minority after an investment round, tag along rights are one of the most important protections you can have. If you are the majority shareholder, you will want to understand that a tag along right can affect the deal you eventually do, and you will usually want a drag along right alongside it so that you can deliver the whole company to a buyer.

Next steps

Read your shareholders' agreement and articles of association and check whether tag along and drag along provisions are already there, and on what terms they are triggered. If you are drafting new documents or taking on an investor, speak to a corporate solicitor about how the two provisions should be balanced so that both the majority and the minority are protected.