What Is a Drag-Along Right?
A drag-along right lets majority shareholders force minority shareholders to join in a sale. Learn how it works and why it exists.
Key Takeaways
- A drag-along right allows majority shareholders to compel minority shareholders to sell their shares on the same terms in a company sale.
- It exists to prevent a small minority from blocking an acquisition that the majority supports.
- The provision typically requires a supermajority threshold and ensures minority shareholders receive the same price per share.
How drag-along rights work
If a buyer wants to acquire 100 percent of a company, they need every shareholder to agree. Without a drag-along right, a minority shareholder holding even 5 percent could block the entire transaction. A drag-along provision allows shareholders holding a specified majority, typically 60 to 75 percent of shares, to force all remaining shareholders to sell their shares on the same terms, enabling the transaction to proceed.
Why buyers and investors want them
Acquirers generally prefer to buy 100 percent of a company rather than dealing with remaining minority shareholders. Investors want drag-along rights because they enable clean exits. Without them, a strategic buyer may walk away from a deal if they cannot guarantee full ownership. This protects the value of the majority's shares by ensuring a viable exit path exists.
Protections for minority shareholders
Well-drafted drag-along provisions include protections for minorities. The most important is that dragged shareholders receive the same price per share and the same terms as the majority. Some agreements also require that the sale price exceeds a minimum threshold, such as a return multiple on invested capital. These protections ensure minorities are not forced into unfairly priced transactions.
Drag-along in African startup contexts
Drag-along rights are standard in venture capital term sheets globally, including in African markets. They become practically important when early angel investors or inactive co-founders hold small stakes and cannot be located or refuse to cooperate during an exit. Founders should ensure their shareholders agreements include clear drag-along provisions from the earliest investment rounds to avoid complications later.