What are Drag Along – Tag Along Rights?

 When a company has multiple owners, there is often a concern that one or more owners could form a control block, and sell out to the disadvantage of the remaining minority owners.  For example, if a company had five 20% owners, each of them individually would be a minority owner and unable to control company decisions.  But if three of these owners banded together, they could decide to sell their interests to a purchaser (perhaps at a premium price) who would acquire a controlling interest and who might be able to “squeeze-out” the remaining minority owners (perhaps at a discount price). 

To prevent this type of scenario, the owners could prepare and execute a buy-sell agreement which contained “drag along – tag along” provisions.  Under the “tag along” provisions, if one or more control block owners received a purchase offer from a third party, the control block owners could not accept such offer unless the other minority owners were given the right to “tag along” and be bought out at the same price and terms.  Under the “drag along” provisions, if the third party purchaser makes an offer to buy all but not less than all of the company stock, the control block owners would have the right to “drag along” the other minority owners and require them to sell at the same price and terms. 

Every company with multiple owners should have a well-drafted buy-sell agreement.  If you need assistance with drafting a buy-sell agreement, or have questions about “drag along – tag along” rights, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Minority interests in a closely-held company are generally worth less that controlling interests in the same company because minority interests lack the ability to control cpmpany decisions. Interests in a closely-held company are generally worth less than comparable interests in a publicly-traded company because there is no stock exchange or other ready market for sale of closely-held stock.  It is important to consider and agree on how interests in a company are to be valued. Call if you have any questions about how to value interests in your company.  Jsenney@pselaw.com or 937-223-1130.

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