What are Drag-Along Rights?

Drag-along rights allow a majority shareholder to force a minority shareholder to agree to the terms of sale for a business. These rights require the majority shareholder to provide the same sale terms to the minority shareholder that are being offered to other shareholders. In essence, drag-along rights are designed to protect a majority shareholder from being subject to the vagaries of a minority shareholder when negotiating the sale of a business. These rights are attractive for an acquirer, since the buyer can gain control of 100% of all outstanding shares of the acquiree. In the absence of drag-along rights, it might be impossible to sell a business to an acquirer that demanded 100% ownership, where ownership was split among several investors.

Drag-along rights are usually incorporated into later rounds of capital funding for a business, so that all investors following the initial investors are subject to the drag-along requirement.

Example of Drag-Along Rights

The founder of a business owns 100% of its shares, and wants to sell a 40% interest to a group of outside investors. However, he does not want them to interfere later, if he decides to sell the entire business to a third party. Accordingly, he includes a drag-along rights provision into his agreement to sell shares to the investors. Later, he locates a suitable buyer and imposes the drag-along provision to force the other investors to approve the sale and sell their shares to the new owner.