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Tag-Along Rights

Also known as: Co-Sale Rights, Tag Rights

Definition

Tag-along rights are contractual provisions in shareholders' agreements that allow minority shareholders to sell their shares alongside majority shareholders on the same terms when a sale to a third party occurs.

Understanding these rights is essential for business owners—they transfer with shares to beneficiaries and determine future exit opportunities.

What Are Tag-Along Rights?

Tag-along rights (also called co-sale rights) are contractual clauses that must be explicitly included in shareholders' agreements or articles of association. Under the Employment Rights Act 1996, Section 205A, tag-along rights allow "holders of a minority of the shares to sell their shares, where the holders of the majority are selling theirs, on the same terms." The Companies Act 2006 does not mandate these rights—they exist only when agreed in writing.

These provisions protect minority shareholders from being "locked in" with unknown third-party buyers. When majority shareholders (holding more than 50%) find a buyer, minority shareholders can require that buyer to also purchase their shares at the same price per share. David owns 60% of a family business, while his sister Emma owns 30% and cousin James owns 10%. When a private equity firm offers David £1.2 million (£2 per share), Emma can sell for £600,000 and James for £200,000 at the same price.

The process requires majority shareholders to notify minority shareholders of offer terms and price. Minority shareholders have a specified period (usually 10-30 days) to decide whether to exercise their rights. Crucially, tag-along rights are optional—minority shareholders can choose to remain invested with the new owner rather than exit.

Tag-along rights commonly include provisions about trigger thresholds, consideration type (many insist on cash rather than share swaps), and warranty limitations. These rights usually apply only after pre-emption rights have been waived. For estate planning, tag-along rights transfer with shares to beneficiaries, affecting liquidity and value of company shares left in wills.

Common Questions

"When do tag-along rights get triggered in a shareholders' agreement?"

Tag-along rights typically trigger when majority shareholders (holding more than 50%) propose to sell to a third party. Some agreements trigger these rights only for full share sales, while others activate them for partial sales above an agreed threshold.

"Can minority shareholders be forced to sell their shares under tag-along rights?"

No, tag-along rights are optional—they give the right but not obligation to participate. This differs from drag-along rights, which compel minority shareholders to sell. Minority shareholders can choose to exercise their rights or remain as shareholders with the new buyer.

"Are tag-along rights automatically included in UK companies?"

No, tag-along rights are contractual provisions that must be negotiated and included in a shareholders' agreement. They are not mandated by the Companies Act 2006. Without explicitly agreed tag-along rights, minority shareholders have no automatic right to participate in a majority shareholder's sale.

Common Misconceptions

Myth: "Tag-along rights are the same as drag-along rights—they both force shareholders to sell together."

Reality: Tag-along and drag-along rights are opposites. Tag-along rights give minority shareholders the option to participate in a sale—a protective right. Drag-along rights give majority shareholders power to compel minority shareholders to sell—an obligation. Tag-along protects minorities; drag-along empowers majorities.

Myth: "All companies in the UK automatically have tag-along rights for minority shareholders."

Reality: Tag-along rights are contractual provisions that exist only when explicitly agreed in writing. UK company law provides some minority protections, but tag-along rights are not among them. Without a written agreement, minority shareholders have no automatic co-sale rights.

  • Drag-Along Rights: The contrasting mechanism that compels minority shareholders to sell when majority exits, whereas tag-along gives the option to participate.
  • Shareholders' Agreement: The document where tag-along rights are recorded, including trigger thresholds and exercise procedures.
  • Company Shares: The underlying assets to which tag-along rights apply, affecting liquidity and value of shares in wills.
  • Minority Shareholder: The protected party under tag-along provisions—shareholders holding less than 50% who gain exit opportunities.
  • Pre-emption Rights: Existing shareholders' right of first refusal that typically takes priority over tag-along rights.

Need Help with Your Will?

If you own company shares, understanding tag-along rights is crucial for estate planning. These rights transfer with shares and determine your beneficiaries' future exit opportunities.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.