Drag-Along Right

Drag-Along Right - Blue Moon Valley, China
Drag-Along Right

This contractual right, most commonly contained in the company’s shareholders’ agreement, enables the majority shareholder (usually holding more than 75% in nominal value) to “drag” the minority shareholders into a specific action, such as selling their shares to the same purchaser.

The majority shareholder must give the minority shareholders who are being dragged into the deal the same price, terms, and conditions as any other seller. The right is intended to be a protection of the majority shareholding venture capitalists.

Some purchasers may be exclusively seeking to gain complete ownership of a company, in which case the drag-along right helps the venture capitalist to realize the deal by eliminating the minority shareholders and sell 100% of the shares to the purchaser.

As a result, founding partners or entrepreneurs could lose their companies. At the same time, the right ensures that the minority shareholders get the offer under the same conditions.

The drag-along right, along with other stringent investor rights, has gained more importance after the era of poor deal structuring in 1999 to 2000 and is now a common prerequisite to concluding any new investment. Not many venture capitalists today will be willing to forgo the drag along right in their contracts.