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31 May 2017

Tag along, drag along and similar clauses in a shareholders agreement

A shareholders agreement will normally address the situation where one or more parties wish to exit the venture, or where there is a falling out between shareholders. This article explains some of the more common provisions.

1. Pre-emptive rights

A shareholders agreement will normally prohibit a shareholder from selling their shares without first giving the other shareholders a reasonable opportunity to buy them. These provisions are known as 'pre-emptive rights'.

The basic idea is to ensure that the existing shareholders cannot be forced to accept an unwanted new shareholder.

Usually the existing shareholders will have the right to buy the exiting shareholder's shares:

  1. in proportion to their existing shareholdings (unless the agreement gives priority to a particular shareholder or shareholders); and

  2. at a price that is not lower than the price offered to any potential third party buyer.

2. Tag along

A tag along provision is a clause that allows minor shareholders to 'tag along' with a larger shareholder or group of shareholders if they find a buyer of their shares.

The purpose of a tag along provision is to ensure minor shareholders are not left behind in the event a major shareholder decides to exit the venture. (You can read more about protections for minority shareholders here.)

3. Drag along

Whereas a 'tag along' clause provides protection to small investors, a 'drag along' provision protects the interests of the major shareholder(s). 

A 'drag along' clause allows a large shareholder (or group of shareholders) to 'drag' the other shareholders into a joint sale of the entire venture.

It means that if the controlling shareholder(s) find a buyer of the entire venture, the smaller shareholders may be forced to join in the sale even if they would prefer not to.

Sometimes drag along provisions will be coupled with a pre-emptive rights clause, so that the minor shareholders have the right to buy the entire venture rather than being forced to work with a new third party buyer.

4. Roulette and other forced sale provisions

Shareholders agreements usually contain a mechanism to address the situation where there is a deadlock or a falling out between shareholders. (A deadlock is a situation where the company is unable to do something because the Board or shareholders cannot agree on the best way forward.)

The most common mechanism is one that results in one shareholder buying out the other(s). These clauses can be structured in different ways. The most common are as follows.

  1. One shareholder gives a notice with an offer to buy out the other(s) at a pre-determined minimum price (such as an independently determined market value, plus a premium.) If the other shareholder(s) do not wish to sell, they have the option to buy out the first shareholder at the same price. Sometimes that will be the end of it. Other times the agreement will allow the parties to make counter offers so that the shareholder(s) willing to pay the highest price will end up buying out the other(s).
  2. Each party delivers a one-off, sealed offer to a third party. The offers are opened simultaneously. Whichever party makes the highest offer will be entitled to buy out the other at that price. 
  3. Each party delivers a single, sealed offer to a third party specifying a price at which they are prepared to sell. The offers are opened simultaneously.  Whichever party offers the lowest price will be required to sell their shares to the other at that price. 

Although these types of provision can be effective in resolving impasses quickly, they also have the potential to produce unfair results - particularly where there is a material disparity between the parties' financial positions. Consequently, when these clauses are used, they are usually tailored to suit the specific circumstances and contain checks and balances to ensure they cannot operate unfairly.

5. Other deadlock and dispute resolution provisions

There are various other ways that shareholders agreements deal with deadlock and disputes, including:

  • Compulsory Mediation. The difficulty with mediation is that it is not guaranteed to produce a result.
  • Arbitration. The main benefit of arbitration is that the dispute can be kept outside of the public eye. One of the drawbacks of arbitration is the time and cost involved, and consequently the impact this can have on the business. Forced sale provisions (as described above) are often preferred for this reason.
  • Winding up or sale. These provisions will allow a party to require the sale or winding up of the entire venture. Whether this type of provision is appropriate will often depend on the nature of business. Unless there is a keen market of buyers, significant value stands to be lost if this provision is exercised.


As will be apparent from the above, there is no 'one size fits all' approach. 

A mechanism that works well for one company may be completely inappropriate for another, taking into account differences between the relationships, businesses, financial resources of the parties and other relevant considerations. There are a number of reasons why should be wary of a shareholders agreement template.

The only way to get it right is to give careful consideration to the various options (some of which may not appear above), and to tailor a solution to suit your circumstances. 

If you would like to know more about what is usually covered by a shareholders agreement, read our separate post here or check out our FAQs on shareholders agreements. If you would like more detail, we would encourage you to download our comprehensive guide

SHA Guide

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About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in the construction and technology sectors.

We specialise in helping businesses:

  • improve their everyday contracting processes,
  • negotiate large commercial contracts and other deals that fall outside of "business as usual", and
  • undertake strategic initiatives, such as raising capital, buying businesses, implementing employee share schemes, designing and implementing exit strategies and selling businesses.
Greg Henry | Principal


Greg Henry | Principal


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Greg has supported clients through $3.5b+ in transactions in the construction and technology sectors. He assists medium sized businesses grow and realise capital value through strategic legal initiatives and business-changing transactions.

greg.henry@turtons.com | (02) 9229 2904