A drag along agreement is a legal contract that allows majority shareholders of a company to force minority shareholders to sell their shares in a company, in the event of a sale of the company. This type of agreement is often used in the context of a merger or acquisition, where the majority shareholders wish to sell the company and the minority shareholders do not.
The purpose of a drag along agreement is to prevent minority shareholders from blocking the sale of a company or demanding a higher price, which can often delay or even derail a potential sale. By including a drag along clause in the shareholders` agreement, the majority shareholders can ensure that they have the power to force all shareholders to sell their shares at the same price and on the same terms.
A drag along agreement typically includes several key provisions, including the percentage of shareholders required to trigger the clause, the price and terms of the sale, and the process for notifying shareholders of the sale. The agreement may also include protections for minority shareholders, such as a requirement that the sale price be fair and reasonable.
In addition to protecting the interests of the majority shareholders, a drag along agreement can also benefit minority shareholders by providing them with a guaranteed exit strategy in the event of a sale. Without a drag along clause, minority shareholders may be left with illiquid shares in a company they no longer wish to hold, which can be difficult to sell and may decrease in value over time.
However, it is important to note that a drag along agreement can also be controversial, as it can potentially override the wishes of minority shareholders and force them to sell their shares against their will. Minority shareholders may also feel that the sale price is unfair or not reflective of the true value of the company.
Overall, a drag along agreement is an important tool for protecting the interests of majority shareholders in the event of a sale, but it is important to approach this type of agreement with caution and ensure that the rights of all shareholders are protected. As always, it is important to seek legal advice and carefully consider the terms of any agreement before signing on the dotted line.