---
title: Drag along rights in a shareholders agreement
description: A drag along right or drag along clause allows a shareholder (or group of shareholders) to 'drag' other shareholders into a sale of the entire company. Learn more here.
---

[Turtons Lawyers | Insights ](https://www.turtons.com/blog)

# [Drag along rights in a shareholders agreement](https://www.turtons.com/blog/drag-along-rights)

 Written by [Greg Henry | Principal](https://www.turtons.com/blog/author/greg-henry-principal) | 18 May 2018

**Drag along rights can be an important protection for a company's founding or controlling shareholders. Here's what you need to know.**

 

 

What is a drag along right?

If a shareholder finds a buyer for the company, a drag along right in a [shareholders agreement](https://www.turtons.com/shareholders-agreement) will allow it to 'drag' the other shareholders into the sale.

A shareholder with a drag along right can initiate a sale of the entire company, regardless of whether the other shareholders agree.

A drag along clause implicitly recognises that minority shareholdings in private companies are not readily liquid. It will often be easier for a shareholder to find a buyer for the entire company, rather than just for its stake.

Although [tag along rights](https://www.turtons.com/blog/tag-along-rights-in-shareholders-agreements) and drag along rights are sometimes confused, they are two completely different concepts. (Learn more about that [here](https://www.turtons.com/blog/tag-along-drag-along-and-other-exit-provisions-in-a-shareholders-agreement).)

## How do drag along rights work?

Drag along rights can be structured in different ways.

There are two threshold questions you will need to decide:

1. What is the minimum proportion of shareholders that should be required to agree to the sale, before the drag along right can be exercised?
2. Should there be a pre-emptive round before the drag along clause applies?

These are discussed below.

## Who should be able to exercise the drag along?

This will depend on your circumstances.

Sometimes a key shareholder, such as a founder of the company or (more commonly) an investor, may require a drag along right even if they don't hold a majority of shares.

Other times, particularly where the share register is more evenly balanced, it may require an agreement between a majority (50%) or special majority (75% or maybe even higher) before the drag along clause can be triggered.

The competing considerations are:

- ensuring that a small number of shareholders cannot thwart a sale that has been approved by a critical mass of shareholders, however that critical mass is defined; and
- ensuring that a shareholder cannot drag the other shareholders into a sale where a critical mass (again, however defined) is against it.

## Should there be a pre-emptive round before the drag along?

The answer to this question ties into the issues discussed above, and is sometimes used as a way to balance the competing considerations.

A pre-emptive round would help any shareholder(s) who may wish to exit to offer their shares for sale to the other shareholders, before being allowed to sell their shares to a third party.

If the pre-emptive round does not result in the shares being sold, usually the person wishing to sell would have a limited time (eg 6-12 months) to sell their shares to a third party. But they would not be able to do so on terms that were more favourable to the terms offered to the other shareholders in the pre-emptive round.

Whether a pre-emptive round is an appropriate pre-condition to the exercise of a drag along right will depend on:

- who holds the drag along right; and
- the likelihood of the other shareholders being willing and able to buy their shares under a pre-emptive round.

For example, if a drag along clause can only be exercised by shareholders holding 90% of the company's shares, a pre-emptive round may be inappropriate if the remaining 10% of the shareholders will not have the capacity or desire to buy 90% of the company.

Conversely, if a minor investor holds a drag along right (say 10%), it may be entirely appropriate for the other shareholders to be given the opportunity to buy that person's shares before being compelled to participate in a sale.

If you have any further questions about drag along rights or shareholders agreements generally, please download our comprehensive guide below.

[View full post](https://www.turtons.com/blog/drag-along-rights)

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