Drag Along appears in situations that specify the relationships between companies and shareholders, that is, through this strategy it is possible to apply sales operations between publicly traded or privately held institutions.
Many companies know the importance of this clause as they involve investment funds, such as private equity and venture capital.
In this article, you will know what Drag Along is and how it can be used.
Keep reading!
What is Drag Along?
Drag Along is a contractual clause that aims to protect the majority shareholder of a publicly traded company on the stock exchange.
With it, it is possible for a majority shareholder to coerce other minority shareholders when accepting an offer from a third party to buy an entire company.
Drag Along is the gateway that allows at least one majority shareholder to carry out the sale of one company to another, without needing any effective consent from minority shareholders. This guarantees the sale of 100% of such a company’s securities to a potential buyer.
How it works?
Drag Along is triggered by all types of sales transactions, such as mergers and acquisitions.
The majority shareholder’s share percentage is variable, which largely depends on the company’s ownership mix and, of course, the negotiating strength of the shareholders. This percentage is between 51% and 75%.
Drag Along helps the majority shareholder in the process of taking the other minority shareholders with him at the time of the negotiation, making them also sell their shares to the potential buyer.
What benefits does it offer shareholders?
There are many advantages when dragging along business contracts. One of its main benefits is providing liquidity, flexibility and an “easy way out” for when a majority shareholder wants to trade their venture.
This clause is favorable to majority shareholders, as it helps to prevent them from being tied to a company that they intend to sell.
As a result, Drag Along also ensures that minority shareholders are treated in the same way as majority shareholders.
The clause also requires that the values, conditions and terms are similar and agreed to all shareholders, and that small shareholders can acquire sales conditions that are timely, which can also be used as a type of guarantee for the majority shareholder. , in case he wants to leave that society.
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