The most important facts in brief:
- Tag-along clauses give shareholders the right to also sell their shares if another shareholder sells his shares.
- Tag-along clauses can be agreed in a shareholders' agreement or in the articles of association.
- Tag-along clauses are widely used for management participations and venture capital funds.
What is a tag-along clause?
A tag-along clause is a co-sale right. A tag-along right gives a shareholder the right to also sell their own shares if another shareholder sells their shares.
Example: A managing director holds a stake of 5 % in a company, the remaining 95 % of the shares belong to a private equity fund. The private equity fund and the managing director have entered into an agreement that gives the managing director the right to sell his shares if the private equity fund sells its shares.
The aim of tag-along rights is to protect minority shareholders. Minority shareholders often have little influence on the operational business of a company. Control essentially lies with the majority shareholder. Minority shareholders should therefore be protected against the majority shareholder selling his shares and the new majority shareholder making major changes to the company without the minority shareholders being able to do anything. Co-sale rights therefore give minority shareholders the right to sell their shares if the majority shareholder sells his shares. The following aspects are central to tag-along clauses:
- Drag-along clausesTag-along clauses are usually combined with drag-along clauses. Drag-along clauses oblige minority shareholders to sell their shares when the majority shareholder sells his shares. The background to this is that many investors want to take over a company for 100 %. Drag-along clauses ensure that individual minority shareholders cannot prevent a complete sale of the company.
- Terms and conditionsIn most cases, it is agreed that the minority shareholders have the right to sell their shares on the same terms as the majority shareholder. In concrete terms, this means that minority shareholders receive the same price for their shares, the same securities, etc.
How are tag-along clauses legally implemented?
Tag-along clauses are implemented in such a way that the majority shareholder may only sell his shares if the purchaser is prepared to acquire the shares of the minority shareholders on the same terms. There are two ways to legally structure the obligation:
- Shareholders' agreementThe co-sale right can be agreed in a shareholders' agreement. A shareholders' agreement is a separate contract between the shareholders that sets out individual rights and obligations, such as the right of co-sale. If the company is a GmbH and the shareholders' agreement contains a tag-along clause, the shareholders' agreement must be notarized.
- Articles of AssociationAlternatively, the tag-along clause can also be included in the articles of association. However, inclusion in the articles of association has the disadvantage that the articles of association are publicly accessible via the commercial register. Accordingly, the modalities under which the co-sale rights can be exercised can also be viewed by third parties. This transparency can have a negative effect in sales negotiations.
You must take the following aspects into account for the legal effectiveness and implementation of tag-along clauses:
- SaleThe prerequisite for the co-sale right is that the majority shareholder sells its shares. At the same time, the majority shareholder should still be able to find co-investors and / or sell smaller shares. Accordingly, the co-sale right often only comes into effect when at least a fixed proportion of the shareholding is sold.
- Pro rataIf the majority shareholder sells only a portion of his shareholding, the minority shareholders generally also only have the right to sell an equal portion of their shareholding.
In which areas are tag-along clauses used?
Tag-along clauses are used in particular for management participations, venture capital and joint ventures. The aim of tag-along clauses is to protect minority shareholders from a withdrawal by the majority shareholder. Accordingly, tag-along clauses are used in constellations in which there is one shareholder who holds a majority stake in a company and there are other shareholders who each hold small stakes.
In the case of management participations, for example, it is customary to give the managing directors a share of around 10 % of the shares so that they pursue the same objectives as the owners. In order to prevent the owner from selling its shares without the managers also having the opportunity to sell their shares, tag-along clauses are usually agreed for management shareholdings, for example.