Right of co-sale: Overview, definition, and example
What is the right of co-sale?
The right of co-sale is a provision commonly included in shareholder agreements or investment contracts that gives certain shareholders the right to participate in the sale of shares by other shareholders. When a major shareholder (typically a founder, investor, or controlling shareholder) decides to sell a portion of their shares, the co-sale right allows other shareholders, often minority shareholders, to "tag along" and sell a proportionate number of their shares alongside the selling shareholder. This right helps ensure that minority shareholders have the opportunity to exit the company under similar terms as the selling shareholder.
For example, if a large shareholder sells 10% of their stake in the company, a minority shareholder with the right of co-sale may also be able to sell 10% of their shares, ensuring they are not left with a reduced or less valuable stake.
Why is the right of co-sale important?
The right of co-sale is important because it offers protection to minority shareholders, ensuring they have an opportunity to sell their shares at the same time and under the same terms as the majority shareholder. This right provides a way for minority investors to liquidate their position in a company when the controlling shareholders decide to exit, making the deal more attractive for the minority holders.
Additionally, the right of co-sale helps maintain fairness in shareholder agreements, preventing majority shareholders from selling their stake without offering a similar opportunity to others who hold shares in the same company. It also helps protect minority shareholders from being stuck in a company with new, potentially unfavorable investors or leadership.
Understanding the right of co-sale through an example
Imagine a startup with two co-founders, one holding 60% of the company and the other holding 40%. If the co-founder holding 60% decides to sell 30% of their shares to a new investor, the co-founder with the 40% stake may have the right of co-sale, allowing them to sell a proportional amount (in this case, 12% of their shares) alongside the sale of the larger shareholder’s shares. This ensures both co-founders can exit the company under the same terms, giving the smaller shareholder the opportunity to benefit from the same deal.
In another example, an investor who holds a minority stake in a private company might have the right of co-sale if the majority shareholder decides to sell their stake to an outside buyer. The investor can then exercise this right to sell a portion of their shares at the same price and terms as the majority shareholder, ensuring they aren’t left behind in a company with new ownership or management.
An example of a right of co-sale clause
Here’s how a clause about the right of co-sale might appear in a shareholder agreement:
“In the event that a shareholder (the ‘Selling Shareholder’) proposes to sell any of their shares to a third party, the other shareholders shall have the right of co-sale. Each shareholder shall have the option to sell a proportionate number of their shares to the third party on the same terms and conditions as those offered to the Selling Shareholder. The right of co-sale must be exercised within [specified time frame] of receiving written notice of the proposed sale.”
Conclusion
The right of co-sale is an important mechanism for protecting minority shareholders by giving them the opportunity to sell their shares alongside majority shareholders when they decide to exit. This provision helps ensure fairness in the sale process, allowing minority shareholders to benefit from the same terms and avoiding the risk of being left with a diminished or less valuable stake. The right of co-sale fosters an equitable shareholder agreement, allowing all shareholders to participate in sales on equal terms and ensuring that they are not excluded from favorable deals.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.