What is a Drag-Along Agreement Review?
A drag-along agreement is a clause that appears in a shareholders’ agreement. It specifies that majority shareholders can force minority ones to join in a company sale.
This has various benefits, such as enabling buyers to purchase the company without having to worry about managing minority shareholders. It can also prevent minor owners from being able to prevent a sale.
If you need to review a drag-along agreement, you might wonder how to navigate the process.
Read the rest of this article to explore key terms to review, things to consider during the review process, and how a qualified lawyer can assist you with reviewing your drag- along agreement to protect your interests.
What are Key Terms in a Drag-Along Agreement?
A drag-along agreement contains some common key terms, such as the following. Review them carefully to ensure they’re clear and easy for all parties to understand.
- Triggering event. Check what events cause the drag along to be executed.
- Approval. It’s crucial to clearly state how much shareholder approval is required to trigger the drag along.
- Notice. Ensure that all minority shareholders are notified when the drag-along right is being exercised.
- Sale terms. The shareholders dragged into the triggering event might need to sell their shares. Provide clarity that they follow the same terms as the shareholders who are initiating the sale.
- Indemnification. Check if the shareholders can be forced to indemnify the company buyer or can limit the minority shareholders’ liability.
- Tag-along rights. For understanding between parties, you should specify how drag-along clauses interact with tag-along rights, if applicable to the agreement. Tag-along rights give minority shareholders the right to take part in certain sales initiated by majority shareholders.
What are Tips for Reviewing a Drag-Along Agreement?
When reviewing a drag-along agreement, make sure that you focus on important aspects of the transfer and sale.
Verify Triggers
Drag-along rights can be triggered by various events or sale transactions, such as mergers, so it’s important to clarify exactly what will cause them to be initiated. This provides clarity for parties.
Check Notice Requirements
Make sure that there’s information provided regarding advance notice for minority shareholders prior to being dragged into the sale. This is usually 15-30 days’ notice.
Protect Minority Shareholders with a Minimum Price
You might want to add a minimum price to the agreement terms, which prevents minority shareholders from being forced into a sale that’s below the pre-agreed value.
Confirm Shareholder Authority
Make sure that the drag-along agreement clarifies which shareholders have the authority to initiate the sale and include if there are any restrictions on their power.
Consider Representations and Warranties
Carefully review what the seller is promising the buyer to ensure everything is clear and prevent confusion. Minority shareholders usually want to avoid being responsible for any broad or vague representations about the company.
Check Other Documents
When reviewing your drag-along rights, you should check the agreement against the company’s shareholder agreement and other relevant documents. These include bylaws and stock purchase agreements.
Doing this during the contract review ensures consistency across all contracts and documents to create a legally solid and enforceable agreement.
Clarify Different Share Classes
It’s important to provide clarity about how share classes will be treated, such as common shares or preferred shares. Since different classes could have different rights, the drag- along agreement needs to address them.
Do You Need a Lawyer for a Drag-Along Agreement Review?
Hiring a lawyer to review your drag-along agreement will protect your ownership rights and financial interests. A lawyer can help you during the review process by:
- Spotting any hidden risks, such as less-than-favorable sale terms.
- Protecting your interests. A lawyer will review all payment and pricing terms to ensure you receive what you’re entitled to.
- Limiting your liability. They’ll analyze all warranties and representations mentioned in the agreement to lower your risk of unexpected responsibilities after the sale.
- Checking minority shareholder protections to determine if the agreement protects them appropriately from unfair treatment.
- Reviewing all trigger events and conditions so that there’s clarity about the drag-along process, such as when it can be exercised and by whom.
- Negotiating any unfavorable terms with the other party.
- Revising the agreement so that the final draft is clear and specific.
Where to Find a Lawyer for a Drag-Along Agreement Review
If you want an in-depth drag-along agreement review from a lawyer, you don’t have to struggle to find a reputable one. On online legal platforms, the lawyer search is easy. You’ll gain convenient access to a network of qualified lawyers who are experienced to help you.
ContractsCounsel is one of the biggest online legal marketplaces that connects you to a network of vetted lawyers in your location. Instead of having to find a lawyer, all you have to do is post a request for a lawyer and you’ll receive bids from lawyers on the platform who are ready to assist you.
To request that a lawyer on ContractsCounsel reviews your drag-along agreement, here are the steps to follow:
- Go to the ContractsCounsel marketplace.
- Post your project for free. Try to mention some details to help you find the most suitable lawyer.
- Wait for bids. You’ll receive multiple bids from experienced lawyers on the platform.
- Review the lawyers’ profiles. Go through the platform’s lawyer data, such as their location, client ratings for previous projects, expertise, and credentials.
- Connect with a lawyer you think is best suited to your requirements and hire them to review your drag-along agreement for a flat fee.