Drag along and tag along are the two mirror-image clauses governing what happens to a minority holding when the majority sells. Drag along obliges the minority to sell as well; tag along gives the minority the right to join the sale on the same terms.
Legal basis
Both clauses are contractual and usually appear in the shareholders’ agreement, sometimes also in the articles of association. Entrenchment in the articles gives proprietary effect and therefore more certainty; a purely contractual clause binds only the parties and, if breached, gives rise to a claim for performance or damages. Article 2:192 of the Dutch Civil Code allows obligations and offer arrangements to be included in the articles. There is also the statutory squeeze-out of Article 2:201a for a holder of at least 95 per cent, but those proceedings are slower and more expensive than a well-drafted drag along clause.
How it works in practice
Drag along almost always has a threshold, for instance that holders of at least 75 per cent may drag the rest, together with safeguards: the same price per share, the same terms, and no warranties heavier than a title warranty for the dragged party. For tag along the key question is whether the right is proportionate, so that the minority may sell pro rata, or whether it covers the entire holding. Investors generally insist on the latter.
Where it goes wrong
The most common problem is a drag along without safeguards, forcing the minority to give warranties on matters it has no information about. A second is unclear pricing where the consideration is not cash but shares in the buyer. A third is the absence of a power of attorney or penalty clause, so that the majority still has to go to court against an unwilling minority shareholder.
Related terms
Both clauses belong in the shareholders’ agreement and the articles of association, and take effect on a share transfer.
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