Article reference: UK-IA-SHA05

Tag along provision in a shareholders' agreement

Tag along provisions are becoming more and more common in shareholder agreements. In this article we explore what they are and how they can work for you.

 
 

Contents

What is a tag along clause?

When is it usual to use a tag along provision?

Should your shareholders' agreement include one?

Further information and documents

 

What is a tag along clause?

A tag along or take along provision gives a minority shareholder the right (but not the obligation) to have his shares bought on the same terms (including price) as majority shareholders.

The primary aim of the clause is to protect minority shareholders with little control over the company from a new controlling investor who might change the business to the detriment of the minority.

When is it usual to use a tag along provision?

A tag along clause is usually negotiated into a shareholders' agreement when majority shareholders sell significant stakes to a new investor.

For example, two founders of a company, each with 50% of the total shares may agree to sell 75% of their holdings to an institutional investor (e.g. a business angel, venture capital fund or private equity fund). In doing so, from having (almost) control positions they would find themselves minority shareholders with far less say in how the business is run.

Institutional investors usually take a significant stake in a company when they invest, and usually want to be in a position to sell at a profit within two to six years. Although the additional equity is valuable in that it allows the company to grow much more rapidly (increasing the value of the minority shareholders' investment), it comes with the downside that the investor is in for the short to medium term and will sell to another party, the choice over whom the minority shareholders are unlikely to have.

Should your shareholders' agreement include one?

We would argue that it should, regardless of whether you are the minority or majority. As well as protecting the minority's investment value, it allows the minority to piggy back on the major investors' ability to find a buyer at an attractive price. Institutional investors usually have excellent networks of potential buyers and the time and people to find the most suitable buyer, sell him the proposition that he should buy, negotiate the best terms and have the paperwork signed up. Minority shareholders, particularly if they are involved in the running of the business, don't have these resources.

The majority shareholder can benefit from a take along clause because it gives the minority investors (again, who are likely to be more involved in running the company) a sense of fairness in treatment that makes them likely to contribute more or at least be less resistant to the possibility of outright sale. Some would argue that a take along provision may put off potential buyers, but in most cases, a new buyer buys in order to change the business direction of the acquisition (for example, merging departments with an existing business to create synergies), and the direction is much more difficult to change when there are minority shareholders involved.

Further information and documents

This is one article about the terms that you should include within your shareholders agreement. We also discuss bring along provisions, and how to obtain greater control over who buys into the company. If you are looking for an agreement, you may be interested in our agreements, which include this clause.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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