What Are Drag-Along Rights?
Let me explain drag-along rights directly to you: this is a provision in an agreement that lets a majority shareholder force a minority shareholder to join in selling the company. If you're the majority owner doing the dragging, you have to offer the minority the exact same price, terms, and conditions as everyone else gets.
Understanding Drag-Along Rights
You need to know that share offerings, mergers, acquisitions, and takeovers are complex, and rights like these get built into the terms of share classes or deal agreements. Drag-along rights are key because buyers often want total control, so these provisions eliminate minority owners by selling 100% of the company's securities.
Watch out for the difference between majority and minority—it's not always straightforward. Check a company's bylaws for ownership and voting rights, as they can affect who holds the majority.
Considerations for Drag-Along Right Provisions
These rights come into play during capital fundraising or merger talks. Take a tech startup raising Series A funds: the CEO with 51% ownership might negotiate drag-along rights to keep control and protect against future sales by forcing investors to sell if a buyer appears.
This setup stops minority shareholders from blocking a sale approved by the majority and ensures no leftover shares from old owners. In private companies, these rights are common, but they might end when the company goes public, as an IPO often resets ownership agreements.
Benefits of Drag-Along Rights for Minority Shareholders
Even though these rights aim to limit minority influence, they can help you if you're a minority holder. The provision requires the same price, terms, and conditions for everyone, so you might get better deals than you could negotiate alone.
Expect an orderly process: you'll get advance notice, details on price, terms, and conditions. If procedures aren't followed, the rights can be invalidated.
Drag-Along Rights vs. Tag-Along Rights
Don't confuse these with tag-along rights, which also appear in share offerings and deals. Tag-along rights let minority shareholders choose to sell but don't force them, which can change how merger terms play out compared to drag-along scenarios.
Real-World Example
Look at the 2019 merger between Bristol-Myers Squibb and Celgene, valued at about $74 billion. Bristol-Myers took 69% of the combined company, and Celgene's minority shareholders had to accept one Bristol-Myers share plus $50 per Celgene share—no special options.
Celgene shares were delisted, forcing compliance. If they hadn't been, drag-along or tag-along rights might have mattered more, and majority holders could negotiate special rights not available to minorities due to drag-along implications.
Key Takeaways
- Drag-along rights are included in share offerings or merger agreements to force minority sales.
- They ensure 100% company sale to buyers by eliminating minority holdouts.
- Tag-along rights offer optional selling for minorities, unlike mandatory drag-along.
- These provisions can protect minorities with uniform terms but are often nullified in IPOs.
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