When negotiating corporate agreements, such as shareholder agreements or partnership agreements, it is common to find important clauses that aim to protect the interests of those involved in share or quota purchase and sale transactions. Two of these essential clauses are Tag Along and Drag Along.
In this post, we will explore the meaning and importance of these clauses for a company’s shareholders and partners.
A tag along clause (or tag along right) is a provision that gives minority shareholders the right to sell their shares together with majority shareholders in the event of a third party offering to buy them. This means that if a majority shareholder decides to sell their shares to a buyer, minority shareholders have the right to sell their shares under the same conditions, ensuring that all shareholders receive equal and fair treatment.
Thus, in a company that adopts the Tag Along clause, the minority shareholder has the right to receive at least 80% of the amount paid per share by the majority shareholder, in the event of a sale of control of a publicly traded company.
It is important to note that this protection applies mainly to common shares (ON), but can also be extended to preferred shares (PN), depending on the level of corporate governance of the company in question.
The Drag Along clause is a provision that allows majority shareholders to force the sale of shares by minority shareholders if they receive an advantageous purchase offer for the entire company.
This clause is important to ensure the effectiveness of transactions, preventing a minority of shareholders from blocking or hindering a sale that is considered beneficial to the majority.
The objective is to allow the company to be sold as a whole, ensuring a more agile and efficient process.
Both Tag Along and Drag Along are clauses that provide security and protection to a company’s shareholders and partners.
Tag Along protects minority shareholders by ensuring that they have the opportunity to sell their shares under the same conditions as majority shareholders in the event of a takeover bid. Drag Along ensures that majority shareholders can conclude an advantageous sale of the entire company, even if some minority shareholders do not wish to sell.
Tag Along and Drag Along clauses can mainly be found in the articles of association or bylaws, shareholders’ agreement or memorandum of understanding (MoU).
Although the articles of association/statute are registered with the Board of Trade, the memorandum of understanding and the agreement between partners are also valid instruments for the formation of these clauses, which address the structure of the company and its next steps.
It is important to emphasize that the validity of the Tag Along and Drag Along clauses is the same, regardless of the instrument used. However, it is essential that the parties involved are aware of the meaning of each clause and are willing to comply with what was agreed.
Therefore, in any business, it is essential to carefully read the aforementioned contracts and seek the help of qualified professionals in drafting these documents.
As instruments that bind partners, Tag Along and Drag Along clauses must be drafted clearly and responsively, so that all parties involved understand exactly what is being proposed.
Each of these clauses aims to protect the interests of partners, therefore, it is crucial that they have the appropriate advice to build more balanced and secure documents.
It is recommended to seek specialized legal advice to ensure that these clauses are properly drafted, in accordance with applicable legislation and the company’s particularities.