Drag-Along Rights

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Definition of 'Drag-Along Rights'

Drag-along rights are a provision in a shareholders' agreement that gives the majority shareholders the right to force the minority shareholders to sell their shares in a company if the majority shareholders decide to sell their shares. This provision is designed to prevent the minority shareholders from blocking a sale of the company and to ensure that the majority shareholders can receive the full value of their shares.

Drag-along rights are typically used in venture capital-backed companies, where the venture capitalists are the majority shareholders. The venture capitalists want to ensure that they can sell their shares in the company if they decide to do so, and they do not want the minority shareholders to be able to block the sale.

Drag-along rights can be structured in a number of ways. One common way is for the majority shareholders to have the right to call a vote of the shareholders to approve a sale of the company. If the majority shareholders approve the sale, the minority shareholders are required to sell their shares at the same price as the majority shareholders.

Another way to structure drag-along rights is for the majority shareholders to have the right to force the minority shareholders to sell their shares to the majority shareholders at a predetermined price. This price is typically set at a premium to the current market price of the shares.

Drag-along rights can be a valuable tool for venture capitalists, but they can also be controversial. Some minority shareholders argue that drag-along rights are unfair because they give the majority shareholders too much power. However, drag-along rights can also be beneficial for minority shareholders because they can help to ensure that the company is sold for a fair price.

Drag-along rights are a complex topic, and there are a number of factors to consider when deciding whether or not to include them in a shareholders' agreement. If you are a minority shareholder, it is important to understand the implications of drag-along rights before you sign a shareholders' agreement.

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