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Comparison

Drag-along vs tag-along rights

Drag-along lets a majority force minorities to sell on the same terms. Tag-along lets minorities join a majority sale on the same terms.

Attribute Drag-along rights Tag-along rights
Whom it benefits Majority / preferred shareholders Minority / common shareholders
What it does Compels minorities to sell when majority sells Permits minorities to sell when majority sells
Typical contract location Stockholders agreement / preferred terms Stockholders agreement / preferred terms
Typical thresholds Majority of preferred or specified series Triggered on any majority transfer above defined size
Outcome for minority Forced exit at the majority's price Optional exit at the majority's price
Why it exists Lets majority deliver 100% to a buyer (clean exit) Protects minority from being left behind in a now-controlled company
Public-company analog Squeeze-out merger / §251(h) Mandatory bid rule (non-US) / appraisal rights (US)
Typical pairing Often paired with tag-along (each protects the opposite side) Often paired with drag-along

When the comparison matters

In private companies, drag-along and tag-along rights together substitute for the public-company toolkit (squeeze-out mergers + mandatory bid rules). Without these contractual rights, a private-company exit gets stuck on holdout minorities or strands them in a freshly-controlled company.

Practical drafting

  • Drag-along thresholds typically require approval of multiple investor classes plus board sign-off
  • Tag-along is usually unconditional once a majority transfer above a defined size is initiated
  • Both are core terms in any institutional preferred-stock investment

Guides

Glossary