Can a single shareholder with one per cent of the company hold up a sale if the would-be buyer insists on an all-or-nothing deal?
Yes, unless the Shareholders’ Agreement lets majority shareholders drag them along!
In this guide, we explain what drag-along rights are, how they work, and what to consider before including them, especially if you hold a majority stake.
What are drag-along rights?
Drag-along rights allow majority shareholders to compel minority shareholders to sell their shares to a third-party buyer on the same terms.
It is a common clause designed to ensure that when the majority agrees to a full company sale, the transaction can proceed smoothly without being delayed or blocked by minority holdouts.
Where are they found?
You’ll commonly find drag-along rights in the company Shareholders’ Agreement, especially deals involving venture capital, multiple co-founders, and really any time future exits are planned from the start.
Specifically, you’ll find it under what’s known as a ‘drag-along clause’.
What does a drag-along clause look like?
Here’s what a typical drag along clause might look like:
In the event that Shareholders holding more than 50% of the shares in the Company, or if the combined shareholdings of Shareholders constitute a shareholding of more than 50% in the Company (“Majority Shareholders”) propose to sell all of their shares to a bona fide third-party purchaser, the remaining shareholders (“Minority Shareholders”) shall be required to sell all of their shares to the same purchaser on the same terms and conditions as those agreed by the Majority Shareholders.
If you’re interested in the implications of the phrasing of this clause, we do a full breakdown in our guide to drag and tag-along clauses.
For the purposes of this guide, just know that this drag-along clause (like most) is only triggered when a shareholder (or a few of them together) holds more than 50% of the shares, meant to reflect majority control.
If this threshold is set below 50%, it allows minority shareholders to force a sale, which defeats the purpose of the clause entirely.
Now let’s see it play out in a hypothetical but common scenario.
Hypothetical scenario
Imagine a company with three shareholders:
- Steve, holding 60%
- Garrett, holding 25%
- Natalie, holding 15%
Steve receives an offer from a third-party buyer who wants 100% of the company.
Under the drag-along clause, Steve can trigger the provision and require Garrett and Natalie to sell their shares too, on the same terms he accepted.
Garrett and Natalie cannot say no to the sale as the clause is legally binding and even collectively, they are still minority shareholders.
Without the clause, they could block the sale, jeopardising the deal.
Actual scenario
In a widely covered case in 2014, the Malaysian court upheld a drag-along clause in a Shareholders’ Agreement between joint venture partners.
PKNS Holdings Sdn Bhd v. Nusa Gapurna Development Sdn Bhd & Anor [2014] CLJU 519
Nusa Gapurna, the majority shareholder, had triggered the clause to compel PKNS — a 30% minority shareholder, to sell its shares to a third-party buyer.
PKNS contested the sale, citing its pre-emption rights to Nusa Gapurna’s 70% stake. However, the court found that once the drag-along conditions including the minimum drag along price were satisfied, the clause was enforceable.
This tells us a well drafted drag-along clause properly triggered can be upheld by Malaysian courts.
The spirit behind a drag-along right
It’s not about sidelining minority shareholders but honouring the commercial intent behind the company’s structure and formation.
A business founded to be sold should be sold if a sale opportunity presents itself.
That said, minority shareholder interests are often balanced with a tag-along clause, allowing them to compel majority shareholders to include them in a sale.
A fair deal is one where all parties make reasonable compromises.
Does my company need drag-along rights?
Depends on what your minority shareholders’ spirit animal is.
On a serious note, that’s a difficult question to answer conclusively, so let us leave you with three!
Short answer
Yes, if you have majority and minority shareholders and want to sell the company.
Long answer
Yes, if you have majority and minority shareholders and want to sell the company, but some of our clients in that situation have opted to exclude drag-along rights because they wanted a business partnership built on mutual trust.
They were majority holders but wanted a unanimous agreement before proceeding with a third-party sale; a drag-along clause would have contradicted that stance.
Honest answer
We don’t know, get in touch and tell us about you so we can give tailored legal advice!
FAQs on Drag-Along Rights
Can drag-along rights apply to partial sales by the majority shareholder?
Usually not. Drag-along rights typically apply to full sales, where the buyer wants 100% control of the company. If the majority shareholder only sells part of their shares, they cannot compel the minority to sell part of their shares too. However, tag-along rights may apply in this scenario instead.
Can the clause be triggered by shareholders acting together?
Yes – if the clause is drafted to allow for combined shareholdings.
Do minority shareholders get the same deal terms?
Usually yes, to ensure fairness.
Can minority shareholders refuse to sell?
No. Once a drag-along is triggered and notice is served, the minority is legally bound to sell and must take all necessary steps to complete the transaction.
Must the threshold be more than 50%?
Typically yes. Setting the threshold above 50% reflects majority control. If the threshold is too low, it could allow minority groups to drag others into a sale – which defeats the purpose of the clause.
Must drag-along and tag-along rights both be included together?
No. Some shareholders’ agreements include only one, depending on the needs of the parties. Whether to include both depends on your commercial priorities, shareholding structure and negotiation dynamics.
Are drag-along rights mandatory in Malaysian shareholders’ agreements?
Not mandatory by law but are commonly included in a shareholders’ agreement, especially when one or more parties hold a majority ownership in the company.
