Drag-along rights allow a majority shareholder to compel minority shareholders to join a sale on the same terms; tag-along rights allow minority shareholders to join a sale initiated by the majority, with each protecting a different party in a change of control.
Drag-along rights protect majority shareholders and buyers. If a majority owner has negotiated a sale of the entire business, drag-along rights prevent minority shareholders from blocking the transaction by refusing to sell their shares. The minority is compelled to sell on the same price and terms as the majority, ensuring the buyer can acquire 100 percent of the business without holdouts.
Tag-along rights protect minority shareholders. If the majority owner sells their stake, tag-along rights give the minority the right to participate in the sale on the same terms, preventing the majority from selling to a new owner who has no obligation to the minority and may have very different intentions for the business. Both provisions are standard in private equity-backed businesses and in any multi-shareholder structure where the parties want to define exit mechanics in advance rather than negotiate them under pressure.
See also: Shareholders Agreement · Deadlock Clause · Deal StructureDrag-along and tag-along provisions define who controls the exit in a multi-shareholder business. They should be agreed before they are needed. See how Wefinx approaches exit planning.