Tag-along right
[2] The tag-along clause itself grants the minority shareholder the right (but not the obligation) to participate in the sale planned by the majority.
A now has a legal obligation to buy B's shares if B so chooses to exercise his/her put option, which disincentivizes A's original opportunistic behaviour.
Majority shareholders are usually big firms with many connections, better negotiating power and stronger capital, and as such are more likely to be able to find a buyer for their shares.
[4] Another reason is that when a majority owner sells his or her stake in a business, this dominant position allows the seller to sell at a price higher than the intrinsic price of the share itself, called a control premium, because the majority holder possesses a higher degree of freedom to make their decisions for the company.
[5] Tag-along rights allow minority holders to also join in this premium and be able to sell their shares at this higher price in any sale between a majority and a third party.
[8] Unlike a company's articles of association, these shareholders’ agreements are not public documents registered to the government, but private dealings between parties.
[4] Failure to comply with the period of notice might also render the clause to be unenforceable in court, as ruled in Halpin v. Riverstone National, Inc., C.A.
[4] It might be worth considering situations where it is appropriate for different shareholders to receive alternative forms of consideration of equal value other than cash in a tag-along sale, subject to the negotiations of all parties concerned.
For instance, in a standard tag-along sale, the majority and minority shareholders will all be compensated with the same amount of cash per share.
Hence, alternative forms of non-cash consideration should be considered and addressed in the shareholders’ agreement beforehand in order to avoid any disputes.
[4] Some companies have a structure which incorporates multiple classes of shares (e.g. A, B and C) that entail different rights/obligations regarding dividends, voting power, asset sales, etc...
Failure to comply with this arrangement will result in the affiliate losing its “permitted transferee” status and having to transfer its newly acquired shares back to the original shareholder.
A common obstacle in exercising tag-along rights found in countries like Korea and Japan, where Articles 355 and 204 of their respective Commercial Codes mandate that any transaction of equity has to be approved by the board within 30 days, beyond which point consent is assumed.
