Trading partners should also investigate what triggering events might cause a partner to apply extraction or tagging rights. If a „transfer” results in a delay, the minority may have to sell at any time if the majority shareholder decides to sell any amount of its shares. But if a „change of control” is triggered, the minority can keep its shares as long as the majority does not relinquish control of the company. From the point of view of the majority shareholder, a right to participate has two decisive advantages. The tag-along clause itself grants the minority shareholder the right (but not the obligation) to participate in the sale contemplated by the majority. The majority shareholder must notify all other minority shareholders subject to accompanying provisions and allow them to participate in the transaction. If the majority shareholder is unaware of this obligation, the put option/right to sell provisions apply to enforce the accompanying clause. For example, if A sells its shares to C without including B, the put option would give B the right to sell its interest in A. A is now legally obliged to buy B`s shares if B chooses to exercise his put option, which discourages A`s initial opportunistic behavior. Essentially, the essence of this mechanism is quite simple: „Either you let me out, or you stay inside.” The possible inclusion of a penalty clause as a put option bonus further deters opportunistic behaviour, as A must now buy B`s shares in the company at a higher price than he originally sold to C, which actually means „either you let me out or you stay in, with a penalty.” [2] Drag rights and accompanying rights are important forms of investment realization in a shareholders` agreement. Label rights allow Investor B to sell their shares at the same price as Investor A and earn the same return.
If the person or company buying the majority shares does not offer to buy the remaining 25% of the shares, this breaks the long-term rights agreement. In the context of the sale of shares, an accompanying right often offers minority shareholders a higher level of protection than a subscription right, especially in situations where the minority does not have the financial means to acquire a controlling interest. As with other contractual clauses, the exact wording of the labelling right would be reviewed by the courts to determine whether it is enforceable. In Seidensticker v. Gasparilla Inn, Inc., No. 2555-CC, 2007 WL 1930428, the Delaware Court of Chancery ruled that labeling rights are unenforceable if the wording of the clause itself does not support such an interpretation, regardless of the intentions of the parties when drafting the clause. [4] A drag right allows a majority shareholder of a corporation to force the remaining minority shareholders to accept an offer from a third party to buy the entire company. The majority shareholder who „pulls” the other shareholders must offer minority shareholders the same price and the same conditions as those offered to the majority shareholder. For example, a controlling shareholder who owns 75% of the company`s shares and agrees to sell his shares as part of a share sale to a potential buyer must offer minority shareholders the same price for the shares if they want to „drag them in”. A drag clause allows the controlling shareholder to drag the remaining minority shareholders with them and force them to sell their shares to the potential buyer at the same price so that the buyer can buy the entire company. As with other treaty provisions, labelling rights have their origins in the doctrine of freedom of contract and are governed by contract law (in common law countries) or the law of obligations (in civil law countries). Since labelling rights are contractual clauses between private parties, they are often found in venture capital and private equity firms, but not in public companies.
[2] Although towing rights are strongly favoured over majority shareholders by preventing them from being „bound” to the company, this type of clause also ensures that minority shareholders are treated in the same way as the majority shareholder. Not clarifying the terms of tag rights is one of the main mistakes. The company must define exactly what a majority shareholder is. In some cases, this percentage is set at 51%, but this must be clearly stated in the shareholders` agreement. If accompanying rights exist, the majority shareholders could take control of a large part of the company if they buy shares from minority shareholders. This could lead to management problems and uncertainty for other shareholders. Minority shareholders subject to transferability should not and generally will not make any representations and warranties other than with respect to capacity and security. This is done on the basis that they have no control over the guarantee package agreed by the selling majority shareholder in the sales documentation. The main purpose of accompanying rights is to protect the interests of minority shareholders in each transaction.