Marking along the provision is intended to ensure that small shareholders are not left behind if a large shareholder decides to leave the company. (To learn more about protecting minority shareholders, click here.) A deduction allows a majority shareholder of a company to compel the remaining minority shareholders to accept an offer to purchase the entire company. The majority shareholder who „drags“ the other shareholders must offer minority shareholders the same price and conditions offered to the majority shareholder. For example, a majority shareholder who owns 75% of the company`s shares and agrees to sell his shares in a potential acquirer must offer minority shareholders the same price for the shares if they want to „follow“ them. A drag along clause will allow the majority shareholder to take the remaining minority shareholders with him and ask them to sell their shares to the potential buyer at the same price, so that the buyer can buy the entire business. Bring-Along rights thus simplify the sale of a business and avoid conflicts in the event of an offer to buy by the majority of shareholders. The reason for this is to give the majority shareholder the right to negotiate a sale on terms acceptable to himself and not to give a voice to other shareholders. Tag along rights differ from drag-along rights, although they have the same underlying view. It is also possible to find tag along rights in share offers as well as in merger and acquisition contracts. Tag-along rights offer minority shareholders the opportunity to sell, but do not impose any obligation. If there are tag along rights, this may have a different impact on the terms of a merger or acquisition than would be discussed with drag along rights. Indeed, an agreement can often avoid a misunderstanding and will go a long way towards setting the boundaries and laying the foundations for the relationship between the parties and, paradoxically, the existence of the provisions on the violation of a carefully studied and well-developed agreement can prevent it from ever being used. Drag along rights can be introduced through equity raising or during merger and acquisition negotiations.
For example, when a technology start-up opens a Series A investment cycle, ownership of the company is sold to a venture capital firm for capital injection. In this concrete example, the majority stake belongs to the Chief Executive Officer (CEO) of the company, who owns 51% of the company`s shares. The CEO wants to retain control of the majority and protect himself even in the event of a possible sale. To do so, it negotiates a drag-along right with the offer of shares in a venture capital firm and gives it the right to compel the venture capital firm to sell its shares in the company if a buyer ever shows up. This provision prevents any future situation in which a minority shareholder may, in one way or another, undermine the sale of a company already approved by the majority shareholder or a collective majority of existing shareholders.