Definition
Tag-along rights are contractual rights (typically in a stockholders’ agreement) allowing minority shareholders to participate in a sale initiated by majority shareholders on the same terms. The minority can “tag along” with the majority’s exit.
Why they matter
Tag-along rights protect minorities from being left behind:
- Without tag-along, the majority could sell to a new controller, leaving minorities as a permanent minority in a now-controlled company
- With tag-along, the buyer must purchase a pro-rata portion from each tagging holder at the same price
Mechanics
- Minority gives notice of intent to tag within a defined window after the majority announces a transfer
- Buyer accepts the additional shares (or the original majority transfer scales down to accommodate)
Distinction
Tag-along rights are protective for minorities. Drag-along rights are enabling for majorities. Many stockholders’ agreements include both.