Drag-Along Rights
Quick Facts
- Purpose: Forces minority shareholders to participate in a sale
- Threshold: Typically requires 50-75% shareholder approval to trigger
- Where found: Shareholder agreements, company bylaws, or charter
- Counterpart: Tag-along rights (protects minority shareholders)
Drag-along rights allow majority shareholders to force minority shareholders to sell their shares in an acquisition, on the same terms and at the same price. This ensures that a buyer can acquire 100% of the company without holdout shareholders blocking the deal.
In Plain English
Imagine you own 5% of a startup and a buyer wants to acquire the whole company. Without drag-along rights, you could refuse to sell and block the deal—or demand a higher price. Drag-along rights eliminate this problem: if enough shareholders approve the sale, you're "dragged along" whether you like it or not.
How It Works
- Buyer offers to acquire 100% of company
- Majority shareholders (meeting the threshold) approve the sale
- Drag-along triggered — minority shareholders must sell
- All shareholders receive the same price and terms
- Deal closes with 100% ownership transferred
Typical Threshold Requirements
| Threshold | Common In |
|---|---|
| 50% + 1 share | Early-stage startups |
| Majority of each class | Later-stage companies |
| 66-75% | More protective structures |
| Board + majority shareholders | Hybrid approaches |
Some agreements require approval from specific investor classes or the board in addition to a shareholder vote.
Why Drag-Along Rights Matter
For buyers:
- Clean acquisition: No minority holdouts blocking the deal
- Certainty: Know you can acquire 100% if majority approves
- Simpler structure: Avoid squeeze-out mergers or complex mechanics
For majority shareholders:
- Deal certainty: Can deliver 100% of shares to buyer
- Better price: Buyers pay more when acquisition is clean
- Efficiency: Avoid negotiating with every small shareholder
For minority shareholders:
- Same terms: Guaranteed to receive the same deal as majority
- No squeeze-out risk: Won't be left holding illiquid minority stake
- Participation: Get liquidity in exit event
Drag-Along vs. Tag-Along Rights
| Drag-Along | Tag-Along |
|---|---|
| Majority forces minority to sell | Minority can join when majority sells |
| Protects majority/buyers | Protects minority shareholders |
| "Come with us whether you want to or not" | "If you're selling, we can come too" |
Most shareholder agreements include both provisions.
Key Terms to Negotiate
Price Floor
Some drag-along provisions only apply if the sale price exceeds a minimum threshold (e.g., 2x the original investment or preferred liquidation preference).
Notice Requirements
Minority shareholders typically receive advance notice (30-60 days) before being dragged.
Carve-outs
Certain shareholders (founders, key employees) may negotiate exemptions or require their specific approval.
Same Terms Guarantee
All shareholders must receive identical terms—no side deals for majority holders.
When Drag-Along Gets Contentious
Lowball Offers
If majority shareholders accept a below-market offer (perhaps because they have liquidation preferences that make them whole), minority holders may be dragged into a bad deal.
Conflict of Interest
VCs with board seats might approve a sale that returns their capital but wipes out common shareholders.
Founder Squeeze-Outs
In extreme cases, investors may use drag-along to force founders out at unfavorable terms.
Legal Protections for Minority Shareholders
- Fiduciary duties: Directors owe duties to all shareholders
- Breach of contract claims: If drag-along terms aren't followed
- Appraisal rights: In some states, dissenting shareholders can seek court valuation
- Fraud claims: If material information was withheld
Famous Example
Dole Food Company (2015)
In the Dole Foods buyout, CEO David Murdock took the company private at $13.50/share. Minority shareholders sued, claiming the price was unfair. Delaware court later found the fair value was $16.24/share—a 20% premium. This case highlighted the importance of process when drag-along affects minority shareholders.
Standard Terms in Venture Deals
Modern venture financing documents (NVCA templates) typically include:
- Drag-along triggered by board + majority preferred + majority common
- Same price, terms, and conditions for all shareholders
- All representations and warranties proportional to stake
- Escrow and indemnification shared proportionally
Practical Takeaways
For founders: Negotiate your drag-along carefully. Push for higher thresholds (66%+ rather than simple majority) and price floors that protect against fire sales. Consider requiring your specific consent for any drag-along.
For investors: Drag-along rights are essential for clean exits. But be mindful of fiduciary duties—dragging minority shareholders into a bad deal invites litigation. Ensure the process is fair and well-documented.
Related Reading
- Anti-Dilution Provisions — Another key term affecting minority shareholders
- Tender Offer — How public company acquisitions work without drag-along
- Hostile Takeover — When buyers can't rely on cooperative shareholders