What are Tag-Along Rights?
Tag-along rights, otherwise known as co-sale rights, are an agreement between shareholders that gives minority shareholders the right to “tag along” with a larger shareholder when they are selling their shares. This means that they have the right to demand that a buyer of the larger shareholder’s shares also purchase their shares at the same price.
Tag-along rights are designed to protect minority shareholders by ensuring that they do not lose out on potential gains if a larger shareholder sells their shares, and the price of the share increases afterwards. This provides minority shareholders with the same level of protection as the larger shareholder.
Who is Eligible?
The tag-along right is available to all shareholders, including founders, employees, family members, and other investors who hold shares in the company. Generally, the tag-along right applies only to shareholders who hold at least a certain percentage of the company’s shares (typically 5-20%). Any shareholder who meets the eligibility criteria has the right to exercise the tag-along right when the company is sold.
Advantages of a Tag-Along Right
A tag-along right gives minority shareholders in a company the ability to join a larger shareholder in a sale of their shares. This can be beneficial for both the majority and minority shareholders.
For the majority shareholder, the tag-along right provides a larger pool of potential buyers. It also helps insulate the majority shareholder from potential legal action, since any potential buyers would have to purchase the minority shares as well.
For the minority shareholder, the tag-along right can ensure that they receive the same sale price as the majority shareholder and can help them extract a higher price than they would have been able to receive on their own.
Disadvantages of a Tag-Along Right
Despite the advantages of having a tag-along right, there are some potential drawbacks. First, a tag-along right may be difficult to negotiate if the company is not open to the idea of giving the investor a stake in the company.
Additionally, tag-along rights can be expensive to implement, as they require time and resources to create and administer. Furthermore, the rights may make it difficult for the company to make strategic decisions or sell the company to another party. Finally, tag-along rights may create potential conflicts between the original investors and the investor with the tag-along right as they can have different goals and interests.
The Bottom Line
In conclusion, tag-along rights are a useful tool for investors, allowing them to maintain a degree of control while still allowing the company to obtain the capital they need to grow. Although tag-along rights can be complex, understanding how they work and how to negotiate them can help investors protect their interests and ensure that they get a fair share of the profits from any sale or merger.