Tag-Along Rights
Tag-Along Rights are contractual rights allowing eligible minority holders to participate in a qualifying sale by a larger or controlling holder, generally by selling a proportional amount on the same or substantially similar terms.
How it works
Tag-Along Rights protect minority holders from being left behind when a major holder sells a controlling or significant stake. The Stockholders Agreement defines the triggering transfer, eligible holders, percentage that may be included, notice period, allocation if the buyer will not purchase all shares and exceptions for permitted transfers. The right is usually optional for the minority holder.
The minority holder chooses whether to participate
Unlike Drag-Along Rights, a tag right generally gives the holder an option rather than an obligation to sell.
A qualifying transfer must occur
The agreement can require a change of control, transfer above a percentage threshold or sale by a designated major holder.
Sale terms are coordinated
The minority holder typically receives the same form and amount of consideration per share, subject to class differences and negotiated exceptions.
Buyer capacity can require proration
If the buyer will purchase only a fixed number of shares, the agreement can reduce the selling holders’ allocations proportionally.
Worked example: control sale
A controlling holder sells 70 million shares and a 10% minority holder elects to tag. The buyer must include the minority shares to the extent required by the agreement or the controlling holder may need to reduce its own sale.
Why the right matters
Tag-Along Rights can give minority investors access to a control-sale liquidity event that otherwise might be available only to the larger holder.
Common mistakes
Treating tag rights as mandatory sale obligations; assuming every transfer triggers the right; ignoring permitted-transfer exceptions; and assuming minority holders always sell their entire position.
Example
A 60% shareholder agrees to sell its stake to a third party. A minority holder with Tag-Along Rights elects to include its eligible shares in the transaction at the same per-share consideration, subject to the agreement’s pro rata limits.
Example
A 60% shareholder agrees to sell its stake to a third party. A minority holder with Tag-Along Rights elects to include its eligible shares in the transaction at the same per-share consideration, subject to the agreement’s pro rata limits.
Professional note
The practical value depends on the trigger. A tag right that applies only to a sale of more than 50% of the company provides less exit protection than one triggered by smaller transfers.
Related terms
- Voting Rights
Voting rights are shareholder rights to vote on specified corporate matters, commonly including director elections and other proposals.
- New Common Equity
New Common Equity is common ownership issued by a Reorganized Debtor or successor under a Chapter 11 plan, often distributed to creditors, sold for new capital or reserved for management and other plan constituencies.
- Board Designation Rights
Board Designation Rights are contractual or security-based governance rights allowing an investor or investor group to designate, nominate or require appointment of one or more directors, usually while specified ownership or other conditions remain satisfied.
- Stockholders Agreement
A Stockholders Agreement is a contract among stockholders, or among stockholders and the company, that governs specified ownership, voting, governance, transfer, consent or exit rights relating to the company’s shares.
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