Drag-Along Rights

A drag-along right is a contractual provision that allows a majority shareholder (or a group controlling a majority) to require minority shareholders to join in the sale of a company. The majority must offer the minority the same price, terms, and conditions as other sellers.

Key takeaways

• Drag-along rights enable a buyer to acquire 100% of a company’s securities by preventing holdouts among minority shareholders.
• They are commonly included in shareholder agreements, stock purchase terms, and M&A contracts—particularly for private companies.
• Minority shareholders must be treated on equal economic terms but are compelled to sell when the provision is exercised.
• Tag-along rights differ: they give minority shareholders the option to sell under the same terms but do not force them to do so.

How drag-along rights work

Buyers often prefer complete control of an acquired company. A drag-along clause prevents minority shareholders from blocking or undermining a sale approved by the majority. When invoked, the company’s governing documents and the sale agreement dictate notice procedures, the price and terms to be applied, and any required approvals.

Typical drafting considerations

• Definition of “majority”: Specify whether it means a percentage of shares outstanding, voting power, or a particular class of stock.
• Scope of coverage: Identify which share classes and current/future shareholders are bound.
• Price and terms: Require the majority to provide identical economic terms to dragged shareholders.
• Notice and procedure: Set timing, documentation, and any required board or shareholder approvals.
• Exceptions and protections: Consider carve-outs for related-party transactions, fiduciary duties, or minimum price thresholds.
• Termination or modification: Address whether drag-along rights survive events like an IPO or are replaced under new share terms.

Benefits and protections for minority shareholders

Although drag-along rights compel minority participation, they can offer protections:
* Equal treatment ensures minority holders receive the same sale terms as the majority.
Contractual notice and procedural requirements provide transparency and an orderly process.
In some cases, minority shareholders may obtain better exit terms than they could negotiate alone.

Drag-along vs. tag-along

• Drag-along: Majority forces minority to sell on the same terms.
• Tag-along: Minority has the option (but not the obligation) to sell alongside the majority on the same terms.

Real-world example

When Bristol-Myers Squibb acquired Celgene (a 2019 transaction valued at roughly $74 billion), Celgene shareholders received a prescribed mix of cash and Bristol-Myers shares. Celgene’s shares were delisted and former Celgene shareholders were required to accept the transaction terms—illustrating how minority holders can be bound by a sale that consolidates ownership under the buyer.

Practical advice

Review shareholder agreements, bylaws, and share-class rights to understand whether drag-along provisions apply and how “majority” is defined. In negotiations, minority investors should seek clear protections on price parity, notice, and procedural safeguards; majority holders should ensure language provides the certainty buyers often need in an acquisition.