Drag Along Clause

A 'Drag Along' Clause is used in situations where there are minority and majority shareholders and its purpose is to protect the interests of a majority shareholder by providing that any third party who has agreed to purchase all of the shares held by a majority shareholder is also entitled to purchase any or all of the minority shareholding in the company. The majority shareholder is therefore effectively 'dragging along' the minority shareholder in his sale of shares.

The clause is useful in so far as it prevents majority shareholders from being caught in the situation where a lucrative opportunity is missed due to the potential purchaser's insistence on acquiring 100% of the shares and the minority shareholder's refusal to sell his shares.

In addition to making special provision within the Articles it is also recommended that the clause is included in a (long form) Shareholder Agreement with appropriately worded majority shareholder bias.