CandleFocus

Tag-Along Rights

Candlefocus Editor
Tag-along rights are important features of an equity agreement, providing increased protection for investors who are not in control of the company. In their simplest terms, these rights allow minority shareholders to sell their shares, along with those held by the majority shareholder, in the case of a sale of the company.

Tag-along rights act as a safeguard, presumably providing minority shareholders with the same options to insert themselves into, and benefit from, the transaction being negotiated by the majority shareholder. This protection is particularly important where the controlling shareholder has a much higher stake in the company than the non-controlling shareholders.

In practice, tag-along rights are usually negotiated between a company’s major investors, including venture capitalists and other angel investors. This allows minority investors to exit the company easily and receive most of their investment back if the company is sold in the future. Typically, tag-along rights provide minority shareholders with the right to sell their shares along with the shares sold by the majority shareholder at the same price per share and under the same terms and conditions, if the majority shareholder agrees to sell a certain percentage of their shares, often between 50%-100%.

It is important to note that tag-along rights also apply to other equity transactions, not just sales of a business. For example, if the majority shareholder increases their stake in the company, the minority shareholders can maintain their own stake and exercise their tag-along rights. In this way, tag-along rights ensure that minority shareholders are not forced to accept different terms or conditions than the majority shareholder.

Overall, tag-along rights provide important legal protections for minority shareholders and ensure that their interests are taken into consideration when major decisions are made about the company. Without these contractual obligations, minority stakeholders may not have the legal protection they need to enjoy the same rights as the majority shareholder. While tag-along rights can sometimes make it difficult to complete a sale of a company or other transaction, it is important for minority shareholders to understand and exercise their rights so that their positions are not overlooked or taken advantage of.

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