Problems with selling your business and minority shareholders

Drag Along rights… No, not a date with Ru Paul, but a crucial and little-known clause outside legal circles.

So, here is the scenario. You have started your company or your Limited Liability Partnership. From scratch, you have created a multimillion-pound empire. Now you want to sell up and move to the BVI, the Caribbean or maybe even Woking.

And then you hit the problem.

You have a minority shareholder, or a fellow Partner, and they do not want to sell. Without some provision in your articles of association or your shareholder agreement, or some other form of agreement, you will not be able to force your minority shareholder or partner to sell their share. The effect of this might be that they can block the sale of your business.

So, what is a Drag Along right? The Drag Along right allows you, as the majority, to force the minority to sell on the same terms as you have agreed. Simple. Important.

But let us say you are the minority shareholder, and you don’t want to get left behind as a shareholder or a Junior Partner in the business whilst the majority shareholders sell up and move to Bexley?

In that event a ‘Tag Along’ right will allow you to insist your shares, or your interest, in the business are bought out on the same terms as the majority. Equally simple. Equally important.

In the absence of either of these rights you will be left in the position of having to negotiate with a minority shareholder with massive potential leverage on whether the deal goes ahead or not. As a minority, you could be forced to remain in a business with new majority shareholders or Partners you know nothing about.

The alternative to drafting correctly, and including the Drag and Tag Along rights, is Court proceedings and lengthy negotiations (and for lengthy, we mean, of course, ‘expensive’.)

If you are trying to sell your business and are affected by the above, speak to Litigation Partner Jonathan Compton.

If you are a majority or minority business owner and you do not have these provisions in place speak to Corporate Partner, Helen Mead.

About the authors


about the author img

Jonathan Compton

Partner

Specialist in commercial disputes, banking and finance, regulatory and anti-trust/competition law.
about the author img

Helen Mead

Partner

Advises clients on all types of corporate mergers & acquisitions, joint ventures, private equity and management buy ins / buy outs across many industries.

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