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Drag-Along Rights and Tag-Along Rights

When starting any type of business with multiple owners (whether it be a limited liability company, corporation, partnership, etc.) it is important to include provisions relating to the sale of the business to a third-party purchaser. These types of provisions are especially important if the owners ultimately intend to sell the business to someone else. Problems can arise in a business sale when one owner, perhaps a majority owner, wants to sell but the minority owner does not. So called “drag-along” rights may be included within an operating agreement or bylaws to address this problem. Drag-along rights are designed to force minority owners of a company to participate in the sale of the company that is initiated by a majority shareholder or the majority in interest. The primary reason for these types of clauses is to prevent a situation where a minority owner can block the sale of a company or business. 

“Tag-along” rights and clauses are similar, but are a benefit to minority owners. Sometimes only a purchaser is interested in buying the majority shareholder or majority interest because a simple majority will give the purchaser full control in the company. There is no need to spend the money to buy the minority interests. In a similar vein, minority owners are often restricted from selling their investments to a purchaser without the consent of the majority. Tag-along rights, then, often permit a minority owner to sell to a purchaser whenever any other owner is permitted to sell to a purchaser. They also permit the minority owner to be included in the sale of a majority owner’s interest so that the minority owner is not left behind and excluded from the sale. 

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