What are Tag-Along Rights?
Tag-Along Rights (also known as "co-sale rights") are a protective legal provision that grants a minority shareholder the right to participate in the sale of shares by a majority shareholder on the exact same terms and conditions.
This right is designed to protect smaller investors, preventing the majority from selling their shares to a third party without offering the same liquidity opportunity to everyone else.
The Purpose: Equal Liquidity Imagine a founder wants to sell a large portion of their personal shares to an external private equity firm. Without Tag-Along Rights, the minority investor would be left out, seeing their equity become potentially less liquid (harder to sell).
- The Right: If the founder sells 50,000 shares at £10 each, the minority shareholder can "tag along" and demand the buyer also purchase a proportional number of their shares at £10 each.
- The Power: If the buyer refuses to purchase the minority’s shares, the founder is then prevented from completing their own sale. This gives the minority leverage.
Tag-Along vs. Drag-Along These two clauses are often confused but serve opposite purposes:
- Tag-Along: Protects the minority (gives them a chance to sell).
- Drag-Along: Protects the majority (forces the minority to sell during a full company acquisition).
Key Takeaway: Tag-Along Rights are a standard defense mechanism that ensures all shareholders have the opportunity to realize liquidity if the majority does.
