Drag along and tag along article of association
These are specimen provisions to be added to the articles of association of a company or possibly a shareholders agreement. The first compels minorities to support (through sale of their own shares) a majority shareholder’s proposed sale of the whole company. The second forces a seller to buy out minority owners on the same terms as the proposed purchase from a majority.
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About this document
Under section 979 of the Companies Act 2006 a person who acquires 90% of the shares of a company may compulsorily acquire the rest of them.
This can be costly. 90% may be too high a percentage for any number of reasons.
Another related consideration is that if a majority shareholder wants to sell his shares, minorities could be very exposed to problems with new control of the company and probably new management.
Here we provide the best way to deal with each of these situations. They can be adopted on one occasion but are best treated as separate provisions. You can use them as articles of association or you can insert them into your shareholders' agreement or another document regulating the relationship between shareholders.
In both cases we have provided changes you can make to the provisions to suit just your circumstances.
We provide this document with the minutes and other papers for recording the directors' meeting and those of an extraordinary general meeting.
Tag along rights
Suppose a majority shareholder wishes to sell out but his buyer is interested only if he can buy the whole company. A minority who own 20% do not want to sell. This article makes sure that they must. This is how it works.
- If a shareholder would like to sell his shares, he must first send a formal notice to every other shareholder. His notice sets out all the proposed sale terms.
- Each of the other shareholders then is compelled to join in his deal and sell their shares on the same terms and effectively as part of the same deal.
Tag along is explained in further detail here.
The sister provision is for drag along. Suppose a (majority) shareholder been offered a really good price for his or her shares. Someone wants to buy his or her 55% shareholding to control the company but does not want all of the shares. Other shareholders are horrified that their company will now be controlled by strangers.
This article makes sure that cannot happen by compelling the selling shareholder to negotiate for them to be in on his deal - if they wish. This works in a similar way as tag along above.
Drag along is explained further here.
This document was written by a solicitor for Net Lawman. It complies with current English law.
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