Drag along clause: making minority shareholders join a sale

Sample clause

a shareholders agreement for Quokka Robotics Pty Ltd, a fictional Perth warehouse automation company owned by two founders, a seed fund and six employee shareholders

12. Drag Along 12.1 If Shareholders holding at least 75 per cent of the Shares (the Dragging Shareholders) accept a bona fide offer from a Third Party Buyer to acquire all the Shares, they may give a Drag Notice to every other Shareholder. 12.2 A Drag Notice must state the buyer's identity, the price per Share, the form of consideration, the proposed completion date and any other material terms, and must attach the offer. 12.3 Each Dragged Shareholder must sell its Shares to the Third Party Buyer at the same price per Share and on the same terms as the Dragging Shareholders, subject to the rights attaching to each class of Share under the Constitution. 12.4 A Dragged Shareholder is required to give warranties only as to its title to its Shares and its capacity to sell them, and its liability is limited to the proceeds it receives. 12.5 Completion must not occur earlier than 20 Business Days after the Drag Notice is given. 12.6 If a Dragged Shareholder fails to complete, each director is appointed as its attorney to sign the transfer, and the Company holds the proceeds on trust for it.

Sample wording, not legal advice.

Variants

What to negotiate

• The threshold

  Founders and investors argue over the percentage because it decides who can force a sale. A threshold equal to the special resolution level of 75 per cent is common in Australian private companies. Minority investors often add a second lock, consent from a majority of their own class, so the founders together cannot drag them into a sale below what they paid.

• Price and form of consideration

  Dragged holders want the same price per share and the same form of consideration, and they resist being paid in unlisted shares of the buyer or in earn out amounts they cannot influence. A minimum price or minimum return for investors, and a requirement for cash or listed securities, are the usual protections.

• Warranties and liability

  A buyer wants warranties about the business from everyone. Minority holders who never ran the company want to give warranties only about their title and capacity, with liability several and capped at their own proceeds. Founders and management usually give the business warranties and the insurance or escrow that backs them.

• Process and timing

  Dragged holders need time to understand an offer and take advice. They ask for a copy of the offer, a minimum notice period, and sale costs paid pro rata out of proceeds rather than charged to them separately. A long stop date after which the drag notice lapses stops it hanging over the register indefinitely.

The risk of leaving it out

Without a drag along clause, a buyer that wants all the shares depends on every shareholder agreeing, so a single small holder can block the sale or hold out for a premium. Compulsory acquisition under the Corporations Act is available only in limited circumstances, generally tied to a 90 per cent holding, which rarely fits a private company sale.

Thresholds in practice

A simple majority threshold, more than 50 per cent, suits small aligned groups but gives a bare majority power over everyone else. Seventy five per cent matches the special resolution level for Australian companies and is the most common starting point. Ninety per cent echoes the compulsory acquisition level and gives minorities far more protection. Venture backed companies often add a class consent, so the drag needs both an overall percentage and a majority of the preference shares, and sometimes board or founder approval as well.

Drag rights and the law

In an Australian proprietary company a drag along in a shareholders agreement binds those who signed it as a contract, and many companies also put it in the constitution so it binds future holders. Adding a drag to a constitution after shareholders have invested raises a harder question, because the High Court has limited amendments allowing compulsory expropriation of minority shares to those made for a proper purpose and on fair terms. In the UK, the Companies Act 2006 squeeze out rules apply once a takeover offer reaches 90 per cent.

Where it sits in a generated document

A generated shareholders agreement carries drag along as a numbered clause in the share transfer section, beside tag along and the right of first refusal, so each can refer to the others by number. The threshold, notice period and warranty limits are written in as content. The document does not cite the Corporations Act or case law, and each shareholder who signs is a separate signature block party.

Documents that carry this clause

Shareholders agreement templateA veterinary diagnostics company has just taken $1.5 million from one seed fund. The founders keep 80 percent between them, so the whole agreement turns on a single number: the 75 percent consent threshold that puts the investor on one side of every decision that matters.

Questions people ask