A drag-along right is a provision often found in shareholder agreements. It allows a majority shareholder to compel minority shareholders to join in the sale of the company if the majority decides to sell their stake. This mechanism is designed to prevent minority shareholders from obstructing a sale or merger, ensuring that the transaction can proceed smoothly.
Drag-along rights are primarily used in corporate law, particularly in the context of mergers and acquisitions. They are included in shareholder agreements to facilitate the sale of a company. This legal concept is relevant in various legal areas, including corporate governance and securities law. Users can manage these agreements using legal templates available through services like US Legal Forms, which provide ready-to-use documents drafted by attorneys.
Here are a couple of examples of abatement:
Example 1: A tech startup has three shareholders: one owns 70% of the shares, while the other two each own 15%. If the majority shareholder decides to sell the company, they can invoke drag-along rights, requiring the minority shareholders to sell their shares as well.
Example 2: A private equity firm owns 60% of a manufacturing company. They receive an offer to sell the company. The drag-along rights in their shareholder agreement allow them to force minority shareholders to sell their stakes to complete the transaction (hypothetical example).
Examples of state differences (not exhaustive):
| State | Variation |
|---|---|
| California | Drag-along rights must be explicitly stated in the shareholder agreement. |
| Delaware | Commonly used in venture capital agreements; enforceability is well-established. |
| Texas | Allows for flexibility in defining the terms of drag-along rights. |
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
| Term | Definition | Comparison |
|---|---|---|
| Tag-along rights | Rights that allow minority shareholders to sell their shares alongside majority shareholders. | Unlike drag-along rights, tag-along rights protect minority shareholders by ensuring they can sell when a majority does. |
| Buy-sell agreement | An agreement that outlines how a partner's share of a business may be reassigned if they leave the business. | Buy-sell agreements focus on ownership transfer upon specific events, while drag-along rights are about sales initiated by majority shareholders. |
If you are a shareholder and drag-along rights apply to your situation, review your shareholder agreement carefully. Understand your rights and obligations regarding a potential sale. If you need assistance, consider using legal templates from US Legal Forms to create or modify your agreements. For complex matters, consulting a legal professional is advisable.
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Drag-along rights allow majority shareholders to force minority shareholders to sell their shares during a company sale.