Introduction

In business deals, especially in startups or smaller companies, things can get tense when someone decides to sell their shares. That’s where tag-along rights come in—your all-access pass to the sale. These rights protect minority shareholders (the smaller players) by letting them “tag along” if a major shareholder (the big player) decides to sell their stake in the company.

Let’s explore what tag-along rights are, why they’re important, and how they can keep your interests safe when someone makes a move to sell.

Read: Why you should always have a contract when doing business

The basics of tag along rights

Tag-along rights (also known as co-sale rights) are terms often found in shareholder agreements. These rights give minority shareholders the option to join in on the sale if a majority shareholder decides to sell their shares. The idea is simple: if the big fish sells, the little fish can jump in and sell their shares on the same terms.

Here’s how it works in a nutshell:

• Scenario: The majority shareholder—let’s call them Big Boss—wants to sell their shares to an outside buyer.

• Tag-along option: Minority shareholders—like you, the Unsung Hero—get the chance to “tag along” and sell your shares to the same buyer, at the same price and conditions.

• Why it matters: It prevents Big Boss from bailing out and leaving you with a new owner you never agreed to or devalued shares because the majority stake has shifted hands.

Why do tag along rights matter

Tag-along rights are like your VIP pass to ensure you’re not left behind when major shareholders make moves. They matter because:

1. Protecting value: They help protect the value of your shares. If Big Boss gets a sweet deal, you get to ride along, ensuring you’re not left with a buyer offering you pennies.

2. Ensuring fairness: Tag-along rights ensure all shareholders are treated fairly. If one shareholder is cashing out at a great price, everyone should have the chance to benefit equally.

3. Maintaining control: They give you some control over who ends up owning a large portion of the company. Without these rights, you could find yourself in business with someone you didn’t choose.

Read: Top 10 legal tips for startups

How tag along rights work in practice

Imagine you’re part of a startup with Big Boss, who owns 60% of the shares, while you and other minority shareholders hold the remaining 40%. A big buyer swoops in and offers to buy Big Boss’s shares. Without tag-along rights, Big Boss could sell their 60%, leaving you with an unknown majority owner. But with tag-along rights, you and the other minority shareholders have the option to sell your shares under the same terms as Big Boss, ensuring you’re not stuck with a deal you don’t want.

Key elements of tag-along rights

A good tag-along rights clause will cover a few important points:

• Percentage threshold: Typically, tag-along rights kick in when a certain percentage of shares are up for sale, usually held by the major shareholder. This threshold is often set around 50% or more.

• Notice period: The clause should specify how much notice the minority shareholders must be given when a major shareholder intends to sell their shares. This period allows you time to decide whether to exercise your tag-along rights.

• Pro rata participation: This term ensures that if several minority shareholders want to tag along, the buyer takes all of their shares in proportion, based on their current holdings.

• Same terms and conditions: Tag-along rights mean you sell on the same terms as the majority shareholder—same price, same conditions, no funny business.

Benefits of tag along rights for minority shareholders

• Peace of mind: Knowing you have tag-along rights gives you peace of mind that you won’t be left in a lurch if Big Boss decides to sell out.

• Increased bargaining power: Buyers know they can’t just cherry-pick the shares they want without including everyone who wants in on the deal. This can help ensure fair pricing for all involved.

• Protection against unwanted changes: These rights help protect you from finding yourself in business with someone new who may not have your best interests at heart.

Read: How to read business contracts like a lawyer

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.

Conclusion

Tag-along rights are a great way to protect minority shareholders when a big shareholder decides to sell their shares. They make sure everyone gets treated fairly, help keep your investment’s value intact, and give you a say in who ends up owning the company. So, if the big player decides to cash out, you can say, “Count me in!” and make the most of a fair exit.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.