Tag along clause: letting minority shareholders join a sale

Sample clause

a shareholders agreement for Brolga Health Software Pty Ltd, a fictional Brisbane clinic scheduling company with a majority founder, a second founder and four angel investors

13. Tag Along 13.1 This clause applies if a Shareholder (the Selling Shareholder) proposes to transfer Shares representing more than 25 per cent of all Shares, in one transaction or a series of related transactions, to a Third Party Buyer. 13.2 Before agreeing the transfer, the Selling Shareholder must give every other Shareholder a Tag Notice stating the buyer, the price per Share and all other terms. 13.3 Each other Shareholder may, within 15 Business Days after receiving the Tag Notice, elect to sell to the Third Party Buyer the same proportion of its Shares as the Selling Shareholder is selling of its own. 13.4 The Selling Shareholder must not complete its transfer unless the Third Party Buyer buys the Shares of every electing Shareholder at the same price per Share and on the same terms. 13.5 Any benefit the Selling Shareholder receives in connection with the transfer, including a consulting or restraint fee, is treated as part of the price per Share. 13.6 Permitted Transfers under clause 10 are not subject to this clause.

Sample wording, not legal advice.

Variants

What to negotiate

• The trigger

  Minorities want the tag to apply to any sale by a founder or major holder. Founders want freedom to sell small parcels for personal liquidity without forcing a buyer into a larger purchase. The compromise is a percentage trigger, commonly a change of control or a transfer above 20 to 30 per cent, with a small annual allowance for founders.

• Pro rata or all shares

  A pro rata tag lets each minority sell the same proportion as the seller, which buyers accept because the total purchase stays near what they planned. A full tag lets minorities sell everything, which protects them better but can make the deal too expensive for the buyer. Full tags are therefore usually limited to a change of control.

• Hidden consideration

  A seller can shift value away from the share price through consulting agreements, restraint payments or a role in the buyer's business. Minorities ask that every benefit connected with the sale count as part of the price per share. Sellers accept this for payments that are really for the shares, while keeping genuine employment terms at market rates outside it.

• Warranties and escrow

  Tagging holders want the same price but not the same risk as a founder who ran the business. They ask to give title and capacity warranties only, with liability several and capped at proceeds, and to contribute to any escrow only in proportion. Buyers usually accept that where the founders stand behind the business warranties.

The risk of leaving it out

Without a tag along clause, a majority holder can sell control privately and keep the whole control premium, leaving minority shareholders locked into a company run by a buyer they did not choose. In an Australian private company with 50 or fewer members the takeover rules that would otherwise require equal treatment generally do not apply, so the contract is the only protection.

Why private companies need the clause

The Corporations Act takeover rules protect shareholders in listed companies, and in unlisted companies with more than 50 members, when someone acquires more than 20 per cent, broadly by requiring acquisitions through regulated processes that treat holders equally. A typical startup or family company has far fewer members and falls outside those rules, so a buyer can acquire control from one or two holders without making any offer to the rest. A tag along clause recreates the equal treatment principle by contract.

How tag along works with drag along and first refusal

The three transfer clauses usually operate in sequence. A seller first offers its shares to existing holders under the right of first refusal. If they decline, the seller may sell to a third party, and the tag along right lets minorities join that sale. If the sale is of the whole company and enough holders agree, the drag along right can then require everyone to sell. Drafting the three together, with consistent notice periods and definitions, avoids a seller satisfying one clause while breaching another.

Where it sits in a generated document

A generated shareholders agreement numbers the tag along clause in the share transfer section, so the drag along and first refusal clauses can cross refer to it. The trigger percentage, the election period and the treatment of related benefits are written in as content. The document does not cite the Corporations Act or ASIC guidance, so statements about the takeover rules in a draft should be confirmed.

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.

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