22 Feb Drag Along Rights

Drag Along Rights

Drag along rights are a type of right that assures a majority shareholder of a corporation, or a majority interest holder of an LLC, that he or she will be able to force any minority shareholders or interests holders to sell their equity in the company on the same terms and conditions that the majority owner negotiated with an outside third party. In other words, if the majority owner of a company puts together a deal with an outside third party, pursuant to which the majority owner agrees to sell his or equity interest to that outside third party, then, upon the exercise of the drag along right, the majority owner can drag the minority owners along with him or her as part of the deal, forcing them to sell as well. This right assures that a majority owner in the company has more power to cause the sale of a company by forcing minority owners to join such sales. Therefore, drag along rights protect majority owners of corporations and LLCs. A related concept to drag along rights are tag along rights, which ensure that minority equity owners in companies can force majority owners to allow them to join the sale of the majority owners’ equity to any third party. In that sense, the minority owners force the majority owners to allow them to tag along on a deal.