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drag along rights vs. tag along rights

sannin99(雷蒙咨询)
本文发表在 rolia.net 枫下论坛Reading any agreement can be a headache to most of us. To have prior knowledge of common legal terms/condition will make the reading/understanding a lot easier. I attended a meeting this morning for an ongoing M&A deal. During the session, the CEO and lawyer started to discussed the resepctive share ownership and the "drag along rights" term came up. I heard it before but never tried to look into it. After the meeting, I googled it and found its definition:

A right that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

Here is the definition for tag along rights:

A contractual obligation used to protect a minority shareholder (usually in a venture capital deal). If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company.

See the difference? one is to protect the majority of the shareholders and the other is to protect the minority of the shareholders.

Why does it matter? It means you can get the deal done if you can win the vote of the majority. Because the rest will be "dragged along" with the same terms and conditions.

Learn sth new everyday and share it with others, which I think is the most effective way to improve both technical and communication skills.更多精彩文章及讨论，请光临枫下论坛 rolia.net
(#203@52)
Last Updated: 2008-9-9
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  • drag along rights vs. tag along rights -sannin99(雷蒙咨询); 2008-9-9 {1488} (#203@52)
    本文发表在 rolia.net 枫下论坛Reading any agreement can be a headache to most of us. To have prior knowledge of common legal terms/condition will make the reading/understanding a lot easier. I attended a meeting this morning for an ongoing M&A deal. During the session, the CEO and lawyer started to discussed the resepctive share ownership and the "drag along rights" term came up. I heard it before but never tried to look into it. After the meeting, I googled it and found its definition:

    A right that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller.

    Here is the definition for tag along rights:

    A contractual obligation used to protect a minority shareholder (usually in a venture capital deal). If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company.

    See the difference? one is to protect the majority of the shareholders and the other is to protect the minority of the shareholders.

    Why does it matter? It means you can get the deal done if you can win the vote of the majority. Because the rest will be "dragged along" with the same terms and conditions.

    Learn sth new everyday and share it with others, which I think is the most effective way to improve both technical and communication skills.更多精彩文章及讨论，请光临枫下论坛 rolia.net
    • Cool. Thanks -buickregal(Sharpness); 2008-9-9 (#204@52)
    • Didn't really get it. -cosmoyx(My way); 2008-9-9 (#206@52)
      • 你哪里看不明白，偶可以用中文给你解释一下。 -specialday(Joyce); 2008-9-9 (#207@52)
    • Great! Thanks for sharing. // 想加精或上导读的，自己看着办啦，雷蒙斑竹。:) -specialday(Joyce); 2008-9-9 (#208@52)
    • My interpretation: -specialday(Joyce); 2008-9-9 {657} (#210@52)
      Look more closely at the definition of the two rights, it is quite easy to follow the definition of Drag-Along Rights. This is designed to protect
      the majority shareholders. Given some buyers are only interested in having complete control of a company, thus drag-along rights help to sell
      100% of a company's securities to the buyer.

      However, don't really understand how Tag-Along Rights would benefit minority shareholders. Perhaps in addition to the right of join in majority shareholders
      in selling their stakes, it also extends the right of selling their shares for a minimum percentage of the price paid for majority shareholders' shares?
      • normally you don't need to buy 100% of shares to have control. -sannin99(雷蒙咨询); 2008-9-9 {383} (#211@52)
        So theoretically, you can pay slightly higher price to get a deal with the majority to control the company. The overall costs of acquisition should be still lower than 100% purchase. Thus the majority enjoys the preferential treatment at the expense of the minority who won't get bought out. With 'tag along', you cannot do this. That's how it protects the minority shareholders.
        • Okay, that makes sense. Now, another question arises. -specialday(Joyce); 2008-9-9 {261} (#213@52)
          My understanding of what you've said above, correct me if I'm wrong, is that a buyer has to purchase 100% of the stakes of a target company if minority
          shareholders have the tag-along rights? Or only if minority shareholders decided to exercise such rights?
        • Is that something called "unsolicited offering bid"? Once your % of all outstanding shares reached a threshold (60% or sth like that?), you have to offer to buy up all. Correct me if I wrong, too old to remember those stuffs learned before. -cosmoyx(My way); 2008-9-9 (#217@52)
    • After a good workout and some nice tea, now my understanding is: -cosmoyx(My way); 2008-9-9 {426} (#216@52)
      After those majority shareholders offered to sell their stakes in a company, under Drag Along Rights term, the minority shareholders have the OBLIGATION to sell their stakes (at the same price and other terms); however, under Tag Along Rights term, the minority shareholders have the OPTION to sell their stakes (at the same price and other terms), of course, they may choose not to sell and cause trouble for the transaction.

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