Meaning
Acquisition of an entire company often depends on clauses that compel every shareholder to sell their stake. When a drag-along is triggered, the minority holders must sell their stakes on the same terms as the majority. This mechanism prevents a small group of investors from blocking a liquidity event.
It standardizes the exit process for all parties involved in the transaction.
Majority Mandate
Execution of this right typically requires a specific threshold of voting power to be met before the compulsion applies. The majority informs the minority of the sale price and the closing date through a formal notice. This ensures the buyer receives a clean cap table with no remaining dissenters.
Without a drag-along, a single shareholder could hold the transaction hostage to extract better terms for themselves.
Shareholder Obligation
Documentation of this clause resides in the shareholders agreement or the bylaws. It creates a binding duty for each signer to cooperate with the merger or acquisition.
Exit Fluidity
Liquidity depends on the ability to deliver total ownership to a strategic acquirer. Large companies rarely purchase startups with scattered minority holdings. This provision simplifies the negotiation by removing the need for individual consent from every person on the cap table.
