Tag along Clause Definition

Labelling rights are there to protect retail investors or minority shareholders. This gives them the right to get the same deal as the majority investor. On the other hand, drag rights protect the interests of majority shareholders by preventing the liquidation of shares and allowing them to force minority shareholders to sell their shares on the same terms as them. Business partners should also investigate what triggering events might cause a partner to enforce design or marking rights. If a “transfer” triggers a charge, the minority may have to sell each time the majority shareholder decides to sell any amount of its shares. But if a “change of control” is triggered, the minority can retain its shares as long as the majority does not relinquish control of the company. In some companies, no shareholder or group owns 51% or a clear majority of the shares, and therefore the application of the right of portability can become questionable unless it is clear what constitutes a majority. This may not happen when they should; Therefore, it is always advisable to mention the exact definition of majority. Sometimes it can also become a majority to have 30% shares. In addition, these conditions should be continuously monitored in the light of a change in the model of participation. As with other contractual clauses, the exact wording of the labelling right would be reviewed by the courts to establish its enforceability.

In Seidensticker v. Gasparilla Inn, Inc., No. 2555-CC, 2007 WL 1930428, the Delaware Court of Chancery ruled that labeling rights are unenforceable if the wording of the clause itself does not support such an understanding, regardless of the intentions of the parties when drafting the clause. [4] Co-founders, angel investors and venture capital firms often rely on identification rights. For example, let`s say three co-founders start a tech company. The company is doing well and the co-founders believe they have proven the concept enough to evolve. The co-founders then seek external investments in the form of a round table. A private equity angel investor sees the value of the business and offers to buy 60% of it, which requires a large amount of equity to offset the risk of investing in the small business. The co-founders accept the investment and make the angel investor the main shareholder. In general, minority shareholders have identification rights because they have the opportunity to liquidate their shares at the same price as influential investors in the company.

The marking of rights often infringes the right of first refusal of the parties concerned. Labelling rights are pre-traded rights that a minority shareholder includes in their first issue of shares in a company. These rights allow a minority shareholder to sell his stake when a majority shareholder negotiates a sale of his stake. Labelling fees are widely used in start-ups and other private companies with significant upside potential. Sometimes only a few types of shares or securities may fall under the labelling clause and it is therefore appropriate to specify to security holders whether their securities are hedged in this way or not. Sometimes only a general mention of such coverage is made, which does not make it possible to determine which titles are covered. In general, labelling rights include three devices: the labelling clause itself and a method of enforcement, such as a put option and/or a penalty clause (applicable only in civil law countries, as the common law does not maintain penalty clauses). [2] The objective of takeaway rights is to offer a majority shareholder liquidity, flexibility and an easy way out. Since many buyers of a target company want 100% control over the company and rarely agree to allow a minority shareholder to retain a minority stake, it would be difficult for a majority shareholder to accept an offer if minority shareholders do not cooperate and block the sale of a company.

In these cases, owners may have sufficient contacts in the industry. However, investors cannot, and owners can better understand the industry because they are part of the day-to-day work. In order not to abuse this advantage they have over other investors, they are therefore bound by identification rights, in which the investors` shares are also sold with the owner`s shares. Finally, when it is difficult to find share buyers during the liquidation process, labelling fees make it easier for small investors to seize the opportunity when it arises. With identification rights, Investor B can sell his shares at the same price as Investor A and get the same return on investment. If the person or company buying the majority stake does not offer to buy the remaining 25% of the shares, it will break the label along the rights agreement. In some cases, this is the case. If a buyer knows that the shareholder`s document contains rights clauses, he could be forced to buy more shares than he wants to hold in the company. Labelling rights are also known as “covente rights” and are the opposite of drag rights.

If a majority shareholder sells his shares, an identification right allows the minority shareholder to participate in the sale at the same time at the same price for the shares. The minority shareholder then “marks” the sale of the majority shareholder. Labeling rights are usually worded in such a way that if labeling procedures are not followed, any attempt to purchase shares of the company is invalid and will not be registered. Simply put, not if your partnership agreement allows it. If your partnership agreement does not explicitly grant you protection, you can stick to your business partner being willing to sell their shares. For example, even if you don`t agree on the price at which the majority sell their shares, you may have to sell at the same price. If your co-owner wants to lunch your sale, he or she can do the same. While these types of deployments can be effective in quickly resolving deadlocks, they can also produce unfair results, especially if there is a significant gap between the parties` financial situation. Therefore, when used, these clauses are generally tailored to the specific circumstances and contain control mechanisms to ensure that they cannot operate unfairly.

Offering labeling rights is not always useful for the company. The dilution of the company`s shares is sometimes good, and various scenarios should be considered before adding rights to the agreement. If identification rights exist, majority shareholders could take control of much of the company by purchasing shares of minority shareholders. This could lead to management problems and uncertainty among the rest of the shareholders. Tag-Along Rights is an agreement that defines the conditions to protect minority shareholders from exclusion in the event that the majority shareholder decides to sell its stake and therefore allows minority shareholders to sell their shares with the majority shareholders at the same valuation. Some shareholders, such as venture capitalists or angel investors, may require that the provisions be conditional and limited or contain certain exceptions. Drag rights are triggered in all types of sales transactions such as mergers and acquisitions or a change of control in the company. The majority shareholder`s share varies depending on the composition of the company`s ownership and the bargaining power of the shareholders, but is generally between 51% and 75%.

A drag right allows a majority shareholder of a company to force the remaining minority shareholders to accept a third-party offer to buy the entire company. .