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How drag-along rights let majority shareholders force a sale even if 49% of shareholders object. Understand clauses, real cases & what to include.

Key differences between ordinary and preference shares under Malaysia’s Companies Act 2016 and how they impact shareholders.

While crucial for minority shareholders, it’s important for all company shareholders to know how tag along rights work, as they affect everyone.   Below, we unpack tag-along rights and by the end, you’ll understand why they are a standard clause in Shareholders’ Agreements in Malaysia  What are tag-along rights?  Tag-along rights give minority shareholders the option to join in a sale on the same terms and conditions if the majority shareholder(s) sell their shares to a third party who then becomes the new majority shareholder.  How they protect minority shareholders Tag-along rights ensure minority shareholders are not stuck in a position where the majority exit the company and leave them with a new controlling shareholder they did not choose and cannot work with.    Such protections are very important in Sdn Bhds whose shares cannot be freely traded, and it is often difficult to find a new buyer for your shares.  Sample tag along clause Here’s an example of a tag-along clause with all the general protections:  In the event that Shareholders holding more than 50% of the shares in the Company, or if the combined shareholdings of the Shareholders constitute a shareholding of more than 50% in the Company (“Majority Shareholder”’) propose to sell all or part of their shares to a bona fide third-party purchaser and that purchaser will become the majority shareholder, each of the remaining shareholders (“Minority Shareholders”) shall have the right, but not the obligation, to sell a corresponding proportion of their shares, or the full amount of their shares, to the same purchaser on the same terms and conditions as those offered to the Majority Shareholders.  The Majority Shareholders shall be required to procure that the purchaser agrees to purchase the shares of any Minority Shareholders who elect to exercise this right. If the Majority Shareholders fail to do so, they shall not be entitled to transfer their shares to the purchaser. Without going into specifics, if a company has this clause in their Shareholders’ Agreement, it will be triggered when >50% of shares are being sold to an outside party who gains majority control.  In such a case, minority shareholders can choose to join the sale, and:  If not, the sale can’t proceed!  Check out our guide to drag and tag-along clauses in Shareholders’ Agreements to see a full breakdown of the wording in this clause. Application of tag-along rights Imagine a private company with three shareholders: Abu (60%), Kumar (25%), and Chong (15%). If Abu wants to sell his entire 60% stake to a third-party and the company Shareholders’ Agreement has the tag-along clause shared above, Kumar and Chong can sell a proportionate percentage of their shares on the same terms. Since the buyer only wants 60% of the company, the sale is divided proportionally: If Kumar and Chong choose to tag along, Abu must procure the buyer to include their shares, and if the buyer refuses, the deal cannot proceed, providing tremendous protection for minority shareholders. Considerations when drafting tag-along clauses   Whenever millions of Ringgit are on the line, expect loopholes to be found and exploited.    Like any contractual right, the scope of your shareholders’ tag along rights will be limited by the clarity of phrasing.  For instance, not stating that majority shareholders must get a buyer to include minority shareholders could undermine the enforceability of the rights.   Ensure your tag along clause clearly defines when tag along rights are triggered, along with explicit notice periods and mechanisms for exercising the right, and all will be well so get in touch for help!  FAQs on tag-along rights in Malaysia 1. Do tag-along rights guarantee a minority shareholder can sell their shares? As long as the majority shareholder can procure the new buyer to purchase the minority shares as well, then yes. However, if the new buyer is reluctant to offer the purchase of minority shares, the sale will not proceed. 2. Can tag-along rights apply to partial sales? Yes, if the clause allows such partial or proportionate sales. 3. Do all minority shareholders have to tag-along together? No. Tag-along rights are optional. Any minority shareholder can choose to exercise the right individually, even if others decide not to. 4. Can tag-along rights be waived? Yes. If minority shareholders choose not to exercise this right, and any applicable notice period expires, their right to tag-along would be waived for that particular sale. 5. Must the majority share sale be more than 50%? While more than 50% is a common threshold, the clause can also specify a higher one, such as 75%. 6. Can tag-along rights apply to smaller share sales? Typically, tag-along rights are triggered when a majority shareholder sells a controlling stake, as the intent is to allow minority shareholders to exit alongside the controlling party. Smaller or minority share sales (that do not transfer control or a significant interest) usually do not trigger tag-along rights, unless the shareholders’ agreement expressly says otherwise. 7. Are tag-along rights mandatory in Malaysian shareholders agreements? No, they are not required by law but are common contractual terms that govern the protection of shareholder rights in the shareholders’ agreement.