What drag-along means for minority shareholders
For minority shareholders, drag-along means they can be obliged to sell their shares on the same terms as the majority owner. Price, timing and other terms therefore cannot be negotiated individually.
At the same time, drag-along provides protection in the form of equal treatment. The minority shareholder receives the same payment per share and cannot be forced to sell on worse terms than the majority.
How a drag-along clause is usually drafted
Drag-along is usually set out in a shareholders' agreement and contains clear conditions for when and how the right may be used.
- Often requires a certain proportion of owners to approve the deal
- Applies to a sale of all or almost all of the company
- The same price and terms apply to all shareholders
- Minority shareholders are obliged to take part in the sale
- The clause is triggered only in specified situations
When the conditions are clearly worded, the risk of conflict at a future exit is reduced.
When drag-along comes into play
Worth bearing in mind
Drag-along comes into play in company sales where a buyer requires all shares to be included in the deal. Without such a clause, a minority shareholder could in practice block the deal by refusing to sell their shares.
The clause is especially common in unlisted companies, venture capital structures and growth companies where a clear exit strategy exists from the start.
Frequently asked questions
Is drag-along the same as a compulsory buy-out?
No, drag-along is contractual and applies in a sale, while a compulsory buy-out (tvångsinlösen) is governed by law.
Do minority shareholders always have to sell under a drag-along?
Yes, if the conditions in the shareholders' agreement are met, the sale is binding.
Can drag-along be used at any price?
No, the price must be the same for all shareholders and follow the terms of the agreement.
Is drag-along common in unlisted companies?
Yes, especially in companies with venture capital or a clear exit strategy.
Where is drag-along set out?
Usually in a shareholders' agreement, sometimes in combination with the articles of association.