Shareholders’ Agreement – Transfer of shares: Drag Along
In a previous blog post, we have been discussing items that can be included in a shareholders’ agreement. Restrictions on the transfer of shares is often included in shareholders’ agreements, as discussed in this post, and while not really a restriction on transfer, a drag along right is often included in shareholders’ agreements as it relates to the sale of shares.
A “drag along” clause in the shareholders’ agreement allows a certain proportion of the company’s shareholders to force a sale of the company if they approve the terms of the third party offer. Typically, the drag along provision is only triggered if a significant percentage of shareholders approve the transaction (e.g.. shareholders representing 75% of the outstanding shares). When invoked, a drag along clause provides that the hold outs can be “dragged along” and forced to sell their shares. A drag along clause can prevent minority shareholders from stopping a sale of the company where the buyer wants the entire company, and not just a significant piece of it.
Thinking of putting a shareholders’ agreement in place for your company? Contact us.