In company law, shareholders have a number of rights. As a shareholder, you may encounter what are known as tag along rights. Essentially, tag along rights are contract provisions outlined in a shareholders agreement. The tag along provision pertains to the rights of minority shareholders. If the majority shareholder or shareholders want to sell shares to a third party, and do not provide notice to the other shareholders, a tag along right will allow the minority shareholder or shareholders to tag along with the majority and sell their shares for the same price and on the same terms. Accordingly, the agreement plays a large role in forming these rights. It is therefore prudent to ensure that you approach the agreement thoroughly. We have listed some useful points for you on this below.
Shareholders agreement
Each shareholders agreement will vary. It is important that when formulating this document, you have an understanding of the terms within it. Whilst tag along provisions are not absolutely necessary, it is best practice to make your agreement as thorough as possible. You never know what may arise in future. It is sensible to be prepared for as many contingent possibilities at all likely to occur. It is possible to amend an agreement. However, getting things right from the outset is always a good idea.
In the agreement, the utility of the tag along provision will be dependent on other elements of the contract. For example, majority shareholders may be required to give minority shareholders first option on purchase shares by providing them notice. This requirement is usually contained within a first right of refusal clause. Without this clause, majority shareholders need not disclose their sale. In any event, the tag along right enables the minority shareholders to follow suit and capitalise on the sale of shares in the same way that majority shareholders would. If you are in the process of drafting your shareholders agreement, it may be worth consulting a contract lawyer for further advice.
Tag along versus drag along
You may also encounter drag along provisions. These are the opposite of tag along. A drag along right is one that enables a majority shareholder to force a minority shareholder to join in the sale of a company. In addition, the drag along concept differs from the tag along right, in that under the former, the minority shareholders must sell their interests. This mandate can impact heavily on your interests.
Accordingly, it is good to familiarise yourself with both concepts if you are a shareholder in a company. Gaining knowledge of how companies function is always a wise idea. There are a number of concepts to explore on company structure. Knowing as much as you can before registering a company is advised. The Australian Government Business website outlines some general information on company law on its website. The more you know, the more you can equip yourself with the skills you need to keep control of your ventures.
Companies have many competing interests. Getting those rights and interests between parties is always a hard balance to strike. Putting these formal terms in place helps maintain legal certainty among parties. However, there can be times when forming these terms can be hard. You may be in a situation where you are facing difficulty exercising those rights as a shareholder. If unsure about your rights, it may be worth seeking the advice of a company lawyer.
