In a business entity – whether a corporation, partnership or limited liability company (LLC) – there are often majority owners and minority owners of equity interests. When an opportunity comes along to sell the entire business, the majority owner may be hampered by uncooperative or unreasonable minority owners. Conversely, minority owners may fear that if the majority owner decides to sells his or her interests, they will be left behind or frozen out. A possible solution to these problems is “Drag Along, Tag Along” provisions in the shareholder agreement, partnership agreement, or LLC operating agreement.
A Drag Along provision provides that if the majority shareholder has entered into an agreement to sell his interest to a third party, he will also have the right to “drag along” the interests of the minority owners and require those interests to be sold simultaneously to the same purchaser, at the same price, and on the same terms and conditions. The Drag Along provision prevents a deal from being held hostage due to the unreasonable demands of minority owners.
A Tag Along is the reverse. If the majority owner has agreed to sell all of his or her interest to a third party, then the minority owners are given the right to “tag along” and simultaneously sell all of their interests to the same purchaser, at the same price, and on the same terms and conditions.
There are other possible solutions to these issues which will be address in future blogs.
Gary Schuster is Senior Counsel on the Business & Estates Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.