In a shareholders’ agreement, mechanisms are commonly included to balance the interests of minority and majority shareholders. Two of the most frequent are the Tag Along clause (right of co-sale) and the Drag Along clause (right of forced sale). In this article, we explain how they work.
What is a shareholders’ agreement?
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Tag Along and Drag Along clauses are typically included in shareholders’ agreements. These are contracts entered into by all or some of the shareholders of a company, separate from the articles of association, to regulate internal matters such as corporate governance, decision-making processes, entry and exit of shareholders, lock-up periods, non-compete obligations or rules governing the transfer of shares.
In Spain, as a rule, a shareholders’ agreement is a private contract between shareholders. However, in the case of start-ups incorporated as limited liability companies, Law 28/2022 allows the shareholders’ agreement to be registered and publicly disclosed, provided it does not contain provisions contrary to law.
Additionally, the law allows the registration of provisions in the articles of association that impose, as an ancillary obligation, adherence to the shareholders’ agreement, provided that the agreement is sufficiently identified so that future shareholders may also become aware of it.
What is a Tag Along clause?
The Tag Along clause protects minority shareholders when a third party seeks to acquire a controlling stake in the company.
If an investor offers to purchase the shares of a majority shareholder, minority shareholders may require that they be allowed to participate in the sale under the same conditions (price, payment terms, warranties and deadlines).
For example, if a third party makes an offer to acquire the shares of a majority shareholder, that third party would obtain control of the company. Minority shareholders could then find themselves in a situation where an unknown party controls the company.
In practice, the Tag Along clause prevents minority shareholders from being “trapped” in a company with a new controlling shareholder with whom they may not wish to remain associated.
If a Tag Along clause is included in the shareholders’ agreement, minority shareholders may offer their shares to the purchaser under the same conditions. This allows them to exit the company more easily if they disagree with the future strategic direction or management approach.
It is important to note that this clause establishes a right, not an obligation. The minority shareholder must therefore assess whether exercising it is in their best interest.
What is a Drag Along clause?
The Drag Along clause protects majority shareholders and applies in the following scenario:
A majority shareholder (or a group reaching the agreed threshold) receives an offer to acquire 100% of the company. If certain minority shareholders refuse to sell, the transaction may be blocked, as the investor may not be willing to proceed without full ownership.
If a Drag Along clause is included in the shareholders’ agreement, the majority shareholder may require the minority shareholders to sell their shares under the same terms to complete the transaction.
Several aspects must be clearly regulated:
- The time during which the right may be exercised.
- The minimum price or, more commonly, an objective valuation formula (for example, an EBITDA multiple, valuation by an independent expert or an agreed fair market value mechanism).
- The consequences of non-compliance with the clause.
Inclusion in the shareholders’ agreement or in the articles of association
As explained above, Tag Along and Drag Along clauses are protection mechanisms for minority or majority shareholders, depending on the case.
They may be included either in the shareholders’ agreement or in the articles of association, based on the principle of freedom of contract. However, they must always comply with corporate law and respect shareholders’ rights.
If included in the articles of association, they are registered with the Commercial Registry and are enforceable against third parties. If included only in the shareholders’ agreement, they bind only the signatories. Moreover, if the agreement remains confidential, it is not enforceable against the company itself (Article 29 of the Spanish Companies Act).
To ensure enforceability against third parties, these clauses are typically incorporated into the articles of association and duly registered.
In limited liability companies, the Commercial Registry Regulations allow the registration of provisions requiring the transfer of shares, provided that the circumstances triggering the obligation are clearly and precisely described.
To incorporate such clauses into the articles of association, unanimous consent of the shareholders is generally required. In any case, obtaining specialised legal advice is strongly recommended to properly negotiate and draft the clause and to avoid future disputes.
Why is legal advice important in these cases?
If you are setting up a company with multiple shareholders, entering into a shareholders’ agreement is essential to ensure clarity and avoid future deadlocks or disputes that could negatively affect the company’s operations.
Specialised corporate legal advice provides:
- Legal certainty in the drafting and structuring of the shareholders’ agreement and Tag Along and Drag Along clauses.
- A tailored analysis of your specific circumstances and corporate structure.
- Full assistance in drafting the articles of association and the shareholders’ agreement.
If you are negotiating a shareholders’ agreement — or an entry or exit of investors — these clauses should be reviewed from both a legal and economic perspective, including thresholds, pricing mechanisms, warranties and enforcement procedures.
At LEIALTA, our corporate team can assist you in structuring these mechanisms to reduce risks and prevent future deadlocks.
