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What are Tag Along and Drag Along clauses?

What are Tag Along and Drag Along clauses?

Shareholders’ agreements usually regulate aspects to protect minority and majority shareholders of companies. These are the Tag Along clause and the Drag Along clause. In this article we will tell you what they consist of.

What is a partnership agreement?

Tag Along and Drag Along clauses are usually included, as we have mentioned, in the partners’ agreements. These are contracts entered into by all or part of the partners of a commercial company, outside the articles of association, which regulate aspects relating to the status of partner. For example: form of organization of the company, activity of each partner and commitment to the business.

The shareholders’ agreement, in certain cases, can be registered in the Commercial Registry, but several requirements must be met:

It must be a start-up company in the form of a limited liability company (SL).

It can only be registered if it includes clauses that comply with the law.

What is the Tag Along clause?

This clause is intended to protect the minority partners of a corporation and is used in the following case:

A third party makes a purchase offer of its shares in the company to one of the majority partners. In this way, this third party would acquire control of the company and the minority partners would find themselves in a situation where an outsider controls the company.

If a Tag Along clause is included in the partners’ agreement, the rest of the minority partners can offer that person their shares in the company under the same conditions. In this way, these minority partners will be able to dissociate themselves from the company more easily if they do not agree with the new objectives for the future or with the form of management.

It is important to bear in mind that this clause is a right, not an obligation, so the minority shareholder should consider whether or not it is in his interest to exercise it.

What is the Drag Along clause?

This clause protects the majority shareholders and is applied in the following scenario:

A majority partner has an offer for the purchase of all the shares or partnership interests. However, the minority partners refuse to sell. If an agreement among all partners to sell is not possible, the investor will not buy.

If a drag-along clause is included in the shareholders’ agreement, in this situation, the majority shareholder can demand that the remaining shareholders sell their shares or participations.

In this case, several aspects must be regulated:

  • The period of time during which the right can be exercised.
  • The minimum price for which the minority shareholders must sell (a price can be fixed or a formula can be created to calculate it).
  • What happens in the event of non-compliance with the clause.

Inclusion in the shareholders’ agreement or in the articles of association.

Drag Along and Tag Along clauses, as we have seen, are protection mechanisms for minority partners or majority partners, as the case may be. They can be included either in the shareholders’ agreements or in the articles of association on the basis of the principle of party autonomy. However, they must always comply with commercial law and must not infringe the rights of the partners.

In the event that the clauses are included in the articles of association, they will be recorded in the Commercial Registry and will be effective against third parties. If they are included in the shareholders’ agreement, they generate obligations before the signatories of the agreement and not before third parties, unless they access to the mercantile registry.

In order to include this type of covenants in the articles of association, all the partners must be in agreement in the shareholders’ agreement. In addition, it is always advisable to obtain the necessary legal advice to negotiate the content of the clause and avoid problems in the future.

Why is it important to obtain legal advice in these cases?

If you want to create a company with several partners it is important, so that everything is clear, to sign a partners’ agreement. This will avoid blockages in the decision-making process and other problems that can have negative effects on the activity of the company.

The legal advice of experts in commercial law will provide you:

  • Legal certainty in the regulation of the partners’ agreement and the Tag Along and Drag Along clauses.
  • A study of your specific situation and the circumstances of the company to verify what options exist.
  • We will take care of all the formalities for the drafting of the bylaws and the shareholders’ agreement.

If you have any questions do not hesitate to contact our team of experts in business consulting to create your company and comply with the law.

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