What are Drag-Along Rights?

Drag-along rights grant the ability of any majority shareholder in a given organization to force minority shareholders to sell their shares. They are generally triggered by sudden mergers or acquisitions by third parties.

When a merger is agreed on, the company to be merged is expected to turn over its existing stock or controlling interest as a part of the process.

This may not be possible if the company in question has existing interest in the hands of minority shareholders and no explicit drag-along rights to fall back on to facilitate such transactions.

Minority shareholders can even oppose the merger or sale of a given company if there are no drag-along rights rules in place for majority shareholders to use.

How drag-along rights work

Drag-along rights come into effect when an acquisition is agreed on, but there are certain requirements majority shareholders must satisfy in order to enforce them.

Drag-along rights terms establish that minority shareholders are entitled to similar prices and conditions as majority shareholders in the event of a sale or merger. The original agreement specifies how exceptions including post-closing arrangements and non-cash payments must be managed.

Can drag-along rights be blocked?

While drag-along rights are meant to force minority shareholders' hands in helping close a pending deal, they are not infallible and can be blocked to an extent by minority owners.

Ways in which a drag sale can be blocked or postponed by minority owners include:

  • Demanding a guaranteed minimum price.
  • Demanding approval from the board of directors before the sale or merger can be completed.
  • Forcing a black-out period to prevent transactions from being completed.

Drag-along rights allow majority shareholders to force minority shareholders into selling their shares in situations such as mergers and acquisitions. However, certain conditions must be in place for majority shareholders to enforce them. Minority shareholders also have some ability to block or postpone their enforcement.