Drag-Along Rights: A Key Tool for Company Sales

In the world of business and investments, drag-along rights are a fundamental clause that can make the difference between successfully selling a company or getting stuck in endless negotiations.

What Exactly Are Drag-Along Rights?

This is a legal mechanism that allows majority shareholders of a company to force minority shareholders to sell their stakes when an offer is made to purchase all or a significant portion of the business. The key is that all shareholders must sell under the same terms, ensuring a smooth and obstacle-free transaction.

Why Is This Clause So Important?

Imagine a tech company with three shareholders: one owns 60% of the shares, another 30%, and the third just 10%. If a major investor appears interested in acquiring 100% of the company, but the minority shareholder refuses to sell, the deal could fall through. This is where drag-along rights come into play: the majority shareholder can activate this clause to ensure everyone sells, preventing a small stakeholder from blocking a deal that benefits the majority.

Real-World Examples in the Spanish Market

A clear example can be seen in the sale of Wallapop. When the platform received a purchase offer from an investment fund, the majority shareholders used drag-along rights to guarantee that all shareholders sold their stakes under the same conditions. Without this clause, the deal would have been much more complicated and might not have happened at all.

Another relevant case was Idealista. With multiple shareholders and investors, the company needed a mechanism to facilitate an orderly sale. The drag-along right ensured that, when the time came for acquisition by an international fund, the process was quick and free of roadblocks.

Legal Considerations

In Spain, drag-along rights are not explicitly regulated by law, but their validity is based on the principle of contractual freedom. This means they must be properly drafted in shareholder agreements or company bylaws to be effective. Additionally, it’s important to note that, according to the Mercantile Registry, unanimous consent from all shareholders is required at the time of inclusion, as it directly affects their rights.

Risks and How to Protect Minority Shareholders

While this clause is very useful for majority shareholders and investors, it can pose risks for minority shareholders, who might be forced to sell at an undesired time or under conditions they deem unfair. To prevent this, it’s crucial to negotiate protections such as a guaranteed minimum price or complementary clauses like tag-along rights, which allow minority shareholders to join a sale under equal terms.

Conclusion: A Necessary Balance

Drag-along rights are a powerful tool that, when used correctly, can facilitate key transactions for a company’s growth and liquidity. However, their implementation must be careful and transparent, always seeking a balance between the interests of all shareholders. That’s why, before including this clause in any agreement, it’s advisable to consult with a specialized lawyer who can ensure the rights of all parties involved are respected.

Ultimately, understanding and properly using drag-along rights can be the difference between a successful sale and a process full of obstacles.