What are Drag Along and Tag Along Clauses?

These are two really important clauses since they are negotiated before making a business investment and allow conflicts to be avoided at the time of divestment or possible exit of the partners. Today they are very common in the Partner Agreements of start ups and in M&A processes. They are very practical for the future development of a Company and are used by both investors and entrepreneurs.

Both clauses imply a restriction on the free transfer of shares or partnership interests and are not expressly included in Spanish mercantile legislation since their origin is in the world of Venture Capital in the United States and their wording it is usually reserved for the Partners Agreement, in which the agreements of the parties are specifically expressed. On some occasion they transcend the Articles of Association; in this case they will become binding for all partners.

The Drag Along clause (right to drag) protects majority partners and, as its name suggests, forces minority shareholders to sell in in case the majority shareholder has a purchase offer for all the shares of the Company. This clause gives the majority shareholder the right to negotiate the sale of 100% of the company, which allows it to reach a more attractive price, without a minority shareholder being able to oppose or hinder the sale. This clause is usually defined with a minimum price, a period of time to exercise this right, and can give the option to the remaining partners to match the offer of a third party.

The Tag Along clause is intended to protect minority partners in a way that gives them the right to sell their participation under the same conditions as the majority or reference partners. In this way, it is avoided that a new majority shareholder gains access to the Company, until now outside the business, without offering an exit or the possibility of disassociation to the minority shareholders. It is therefore an obligation for the buyer if he wants to continue with the operation. In the event that the buyer does not wish to acquire all the shares or participations, the offer is usually distributed proportionally among the percentage of the share capital of the partners who have decided to accept it.

As a conclusion, it is essential to know the intention and meaning of both clauses since they have become two points that frequently have to be negotiated in the Sale and Purchase Agreement (SPA). Therefore, it is essential more than ever to have adequate advice in defense of our interests.