If you sell most of your company and keep a share, the person who bought the rest will probably want to sell the whole business one day. When that happens, two clauses decide what becomes of your shares. A drag-along can make you sell. A tag-along lets you insist on selling. They usually take up a page or two of the articles, and they're easy to skim past when your mind is on the price.
This guide explains how each one works in a UK private company, and what to ask for before you sign. It's written mainly for owners who keep a share after selling part of their business, but the same clauses apply to managers and investors with shares.
What drag-along and tag-along rights do
A drag-along right lets shareholders who hold an agreed percentage of the shares, and who have accepted an offer for the whole company, require the other shareholders to sell to the same buyer on the same terms. It exists because buyers usually want all of a company, and one small shareholder saying no could otherwise stop the sale.
A tag-along right works the other way round. If the majority sells its shares, the minority can require the buyer to buy theirs too, on the same terms. It stops a smaller shareholder being left behind with a new owner they didn't choose.
A made-up example shows both. You sell 70% of your company and keep 30%. Five years later, your co-owner agrees to sell the whole company for £3,000,000. With a drag, they can require you to sell your 30% to that buyer for £900,000, the same price per share they get. Without one, the buyer needs your agreement, and you could hold out for more or refuse. If your co-owner sold only their 70% instead, a tag would let you insist that the buyer took your shares at the same price per share.
Neither right exists unless it's written down
Drag and tag rights aren't given by law. They exist only if the company's articles or a shareholders' agreement creates them, and the model articles that many small companies use contain neither.
The Companies Act 2006 does have its own, narrower rule. If a buyer makes an offer for all the shares on the same terms, and the holders of at least 90% of the shares the offer covers accept, with 90% of the votes as well where the shares carry votes, the buyer can give notice to buy the remaining shares compulsorily. There's a mirror image for the minority. Once the buyer holds 90% of the shares and votes, a shareholder who hasn't accepted can require the buyer to buy them out.
Those rules need a formal offer for every share, and acceptances from the holders of 90% of them. If you keep 30%, that can't happen without you. A drag-along can be set at a lower percentage, and it works through an ordinary sale.
Where the rights are written
Drag and tag rights can sit in the articles, in a shareholders' agreement, or in both. The difference matters. The articles bind the company and every shareholder, including people who get shares later. An agreement binds only the people who sign it. If a manager is given shares and never signs the agreement, a drag that appears only in the agreement may not bind them. That's why the drag is usually put in the articles, with the detail repeated in the agreement.
Timing matters too. The articles can be changed by special resolution, which needs at least 75% of the votes, so a shareholder with more than 25% can block a new drag. Nobody can be made a party to an agreement without their consent. The easiest time to settle both clauses is when shares first change hands, which for most owners means when they sell part of the business.
How a drag works in practice
- The majority agrees a sale of the whole company that meets the conditions in the clause.
- They send a drag notice to the other shareholders, setting out who the buyer is, the price per share, how it will be paid and when the sale will complete.
- The other shareholders sign the sale documents and transfer their shares at completion.
- If someone won't sign, the clause can let a director sign the transfer for them, and the company holds their money until they collect it.
If the articles also give shareholders first refusal whenever anyone sells, the drag clause should switch that off for a dragged sale. Otherwise the two can trip over each other at the worst moment.
What the same terms should mean
Every drag promises the same terms, and that phrase is the minority's main protection. It needs pinning down, because a sale is rarely just a price paid in cash on the day. These are the points to settle.
- The price. The same price per share for every share of the same class. Anything extra the majority gets, such as pay for staying on, should be separate from the price for shares.
- The form of payment. If the majority takes part of its price as something other than cash, such as an earn-out, decide whether you have to take the same mix or can choose cash.
- Timing. If part of the price is paid later, you should receive your share of it at the same time as everyone else.
- Promises about the business. A dragged shareholder should only have to promise that they own their shares and can sell them, not give warranties about a business they don't run.
- Liability. Any claim against you should be limited to your own share of it and capped at what you receive.
- Costs and retentions. Your share of the sale costs, and of any money held back to cover claims, should be in proportion to your shares.
- Restrictions. You shouldn't be bound by promises not to compete that you'd never agree to on your own.
The trigger and the threshold
The clause sets the percentage of the shares whose holders must accept an offer before they can drag the rest. It might be a simple majority or 75%, or whatever else the owners agree. The higher it is, the more say a smaller shareholder has. If you keep 30% and the drag needs 75%, your co-owner's 70% isn't enough on its own.
Beyond the percentage, these conditions are worth asking for.
- The buyer must be a genuine outside buyer dealing at arm's length, not a business connected to the majority.
- A minimum price, or a valuation floor, below which the drag can't be used.
- No drag for an agreed period after you first sell, so you get the time you planned to stay.
- Enough notice, and a copy of the buyer's offer, before you have to do anything.
Tag-along rights in more detail
A tag is often triggered by a sale that would give a buyer control of the company, for example more than half of the shares. The clause gives smaller shareholders a short window to say they want to join in. If they do, the buyer has to buy their shares at the same price per share and on the same terms, and if the buyer won't, the majority can't complete.
The same price per share should include any premium the buyer pays for control. Buyers sometimes pay more for the shares that give them control, and a tag stops that extra going only to the majority. Some transfers are usually left out of a tag, such as a shareholder moving shares into a holding company they own, because control doesn't really change hands.
For an owner who keeps a share, the tag matters most if the buyer of the rest might sell on before you're ready to go. Without one, you could find yourself in business with a new owner you've never met, with no right to leave on the terms they were offered.
When the whole company is sold
When the day comes, a dragged or tagged sale runs like any other share sale. The buyer carries out due diligence first. Then every seller signs the share purchase agreement, or a shorter version of it, and the shares change hands at completion.
Your tax is your own, whatever the majority's position. You'll usually pay Capital Gains Tax on the gain on your shares, and whether Business Asset Disposal Relief applies depends on whether you still meet its conditions at the time of that sale, not when you first sold part. If you've stopped working in the business or your holding has fallen, check with your accountant well before a buyer appears.