TAG ALONG clause

The essence of a tag along clause is to provide a privileged (usually minority) shareholder with an advantageous position by giving such a shareholder the right to ‘join in’ a share sale transaction by another shareholder or shareholders.

The minority shareholder may in such a situation request the sale of his shares on the same terms as the shareholding rights of the majority shareholder.

The clause is therefore intended to provide security for the shareholder in the event of the exit of the majority shareholder.

Indeed, he can decide whether, with a view to the entry of a new entity into the company, he wishes to continue to participate in a particular project or whether he prefers to leave the company with the majority shareholders.

In practice, if the majority shareholder intends to divest its shares in the company, the majority shareholder is obliged to inform the preferred shareholder of the intended transaction, and the preferred shareholder has the right to require the majority shareholder to cause the purchaser of its shares to also acquire a proportionate number of shares from the preferred shareholder, i.e. the one to whom the tag along clause has been reserved.

The possibility of another shareholder joining the transaction also increases the chances of selling the shares, as shareholders with a small number of shares may have difficulty finding a buyer.

In addition, the possibility to ‘join in’ gives the shareholder the chance to obtain the market price for the shares.

A shareholder’s preference thus consists of the possibility for the shareholder to decide to sell some or all of his shares in the company as part of another shareholder’s transaction.

Undoubtedly, a tag along clause is a form of restriction on the transferability of shares, as the transferor cannot sell its shares without allowing the entitled shareholders (i.e. those for whose benefit the tag along clause is reserved ) to sell their shares.

The tag along clause should also be adequately secured, e.g. by introducing a contractual penalty in the contract for breaches of the tag along obligations .

Another form of sanction may be to regulate in the contract the procedure for compulsory or automatic redemption of shares in the event of breach of the tag along rules .

At the same time, it should be mentioned that a tag along clause in negotiations is often a response to a drag along clause.

The drag along is, so to speak, a reversal of the tag along and consists in the possibility of the (majority) shareholder selling his shares to require the other shareholders to sell their shares on analogous terms.

Both clauses balance the position of the parties in proportion to their shareholding in the company’s share capital.

In practice, investors are usually interested in acquiring all the shares, so the clause more often used in practice is the drag along clause .

Authors:

• Katarzyna Gelo
• legal assistant Emilia Skibowska