Home > Legal Articles > What happens when shareholders cannot agree to sell the company? : Drag and Tag provisions

What happens when shareholders cannot agree to sell the company? : Drag and Tag provisions

Posted on Monday, 12th October 2015 by

Selling a company can be a stressful time, particularly if the shareholders cannot agree to the fundamental terms of the sale.

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When a buyer wants to buy the entire shareholding in a company, consent may be required by all parties in order for the sale to go ahead. If one shareholder disagrees then the sale may fall through. This in turn could cause a hostile relationship between the shareholders which could be detrimental to the company.

The implementation of a drag provision would allow majority shareholders in this scenario to force the minority shareholders to accept the offer and “drag” them along in order to sell the entire company.

But what if a buyer only wants to buy part of the shareholding in a company?

In this scenario a tag provision can be utilised by the minority shareholders. A tag provision acts as security for minority shareholders and it works in the opposite way to a drag provision. It allows the minority shareholders to “tag” along with the majority shareholders by forcing the buyer to buy the entire company.  There runs a risk in using this provision, that the buyer may not wish to buyout the minority shareholders and this would result in the whole sale falling through.

Drag and tag provisions can be documented in a shareholders’ agreement or a company’s articles of association. These are aggressive provisions and can result in an ‘all or nothing’ situation; however, they are effective in ensuring harmony between shareholders. As the position of the majority shareholders, the minority shareholders and the company itself are very different, independent legal advice should always be sought when deciding whether to include drag and tag provisions.

If you would like to discuss the contents of this blog or have any related queries, please do not hesitate to contact our business law team on 0116 266 5394 or contact Jade Price direct by email at jade.price@ehlsolicitors.co.uk.

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The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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