Drag along rights are the rights majority shareholders have to essentially force minority shareholders to participate in the company’s sale, giving minority shareholders the same price, terms, and conditions as any other seller. It’s literally a big guy dragging along the little guys, and they’re designed to protect the big guy, but it benefits the little guy too because it means they get the same price, terms and conditions as everybody else. Essentially, it means the minority shareholders are treated like the big boys and can get a big payout that they otherwise would never be able to get on their own.
Drag along rights can be triggered when a merger or acquisition occurs. And they are in place because the buyer of a company often wants complete control and this helps prevent minority owners from sticking around.
Drag along-rights happen during the investment negotiations of a company’s majority shareholder and minority shareholders. It presents a minority shareholder from blocking the sale of a company that the majority shareholders want. Rights like this one are normally outlined in a company’s governing agreements, and they sometimes require unanimous consent for sale.
Just because I’m a minority shareholder doesn’t mean you can drag me along on this sale. Oh, I signed a drag along rights agreement? Well fine then, I’ll take the payout.