What is Tag-Along Rights? Plain English Explanation
Definition
Tag-along rights (also called co-sale rights) protect minority shareholders by allowing them to join in when majority shareholders sell their shares. If the majority sells, minorities can sell their shares on the same terms and at the same price.
Why It Matters in Contracts
Without tag-along rights, majority shareholders could sell their stake to a new owner, leaving minority holders stuck with a different controlling party and no opportunity to exit. Tag-along rights ensure you are not left behind.
Real-World Example
A startup's lead investor sells their 40% stake to a private equity firm. Thanks to tag-along rights, you as a 5% shareholder can sell your shares to the same buyer at the same price per share.
What to Watch For
- 🔴Tag-along rights that only apply above a certain sale threshold
- 🔴Short exercise periods that do not give you time to decide
- 🔴Exceptions for transfers to affiliates (which could circumvent the rights)
- 🔴No tag-along rights at all in the shareholder agreement
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Disclaimer: This glossary entry is for educational purposes only and does not constitute legal advice. Consult a qualified attorney for guidance on your specific situation.