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What Are Tag Along Rights and Why They Matter for Shareholders
Definition & Meaning
Tag along rights are legal protections for minority shareholders in a corporation. These rights ensure that if a majority shareholder decides to sell their shares, minority shareholders have the option to sell their shares under the same terms and conditions. This provision aims to protect the interests of minority shareholders by allowing them to participate in the sale, thereby preventing them from being left behind in a transaction that could affect their investment.
Table of content
Legal Use & context
Tag along rights are commonly found in corporate law and are often included in shareholders agreements. They are particularly relevant in the context of mergers and acquisitions, where the sale of shares can significantly impact minority shareholders. By including tag along rights in agreements, minority shareholders can secure their position and ensure they have a fair opportunity to exit alongside majority shareholders.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A majority shareholder owns 70 percent of a company and decides to sell their shares to an outside investor. The tag along rights allow the minority shareholders, who own the remaining 30 percent, to sell their shares to the same investor under the same terms.
Example 2: In a hypothetical scenario, a tech startup has three co-founders. If one co-founder, holding a majority stake, plans to sell their shares, the other co-founders, as minority shareholders, can exercise their tag along rights to sell their shares simultaneously.
State-by-state differences
Examples of state differences (not exhaustive):
State
Tag Along Rights Variations
California
Tag along rights are often explicitly defined in corporate bylaws.
Delaware
Delaware law provides flexibility in drafting tag along provisions.
New York
Commonly included in shareholder agreements, with specific requirements for notification.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Drag Along Rights
Rights that allow majority shareholders to force minority shareholders to sell their shares in a sale.
Drag along rights benefit majority shareholders, while tag along rights protect minority shareholders.
Preemptive Rights
Rights that allow existing shareholders to buy additional shares before the company offers them to new investors.
Preemptive rights focus on share issuance, whereas tag along rights focus on share sales.
Common misunderstandings
What to do if this term applies to you
If you are a minority shareholder and a majority shareholder plans to sell their shares, review your shareholders agreement to confirm your tag along rights. If these rights are included, ensure you understand the process for exercising them. You may want to consult with a legal professional to navigate the sale effectively. Additionally, you can explore US Legal Forms for templates that can help you manage the situation.
Find the legal form that fits your case
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Typical fees: Varies based on the complexity of the agreement.
Jurisdiction: Corporate law, varies by state.
Possible penalties: None for not exercising rights, but you may miss out on sale opportunities.
Key takeaways
Frequently asked questions
Tag along rights are provisions that allow minority shareholders to sell their shares under the same conditions as majority shareholders during a sale.
No, tag along rights must be specifically included in the shareholders agreement to be applicable.
Check your shareholders agreement to see if tag along rights are mentioned.
Yes, tag along rights can be negotiated and included in the terms of the shareholders agreement.
If you choose not to exercise your tag along rights, you may miss the opportunity to sell your shares under favorable conditions.