A Guide To Drag & Tag-Along Clauses In Shareholders’ Agreements

Majority – minority shareholder conflict

Without firmly established rules, company exits are a breeding ground for conflict if majority shareholders seek to sell while minority shareholders resist the sale lest they get left in an unfavourable position. 

For the purposes of this guide, company shareholders are generally categorised as: 

• majority shareholders who hold >50% of company shares, and 

• minority shareholders who hold <50% of company shares 

For this reason, though not expressly mentioned in Malaysian statutes, drag-along and tag-along clauses are standard inclusions in Shareholders’ Agreements to clearly define obligations during share transfer. 

Drag-along rights 

Think of a drag-along right like being in a car co-owned by a group of people and the majority owner is in the driver’s seat.

When they find a serious buyer, the other co-owners with smaller shares must sell their part on the same terms.  

Drag-along rights protect majority shareholders by allowing them to compel minority shareholders to sell their shares in a company sale. 

Essentially, the co-owners are dragged along with the sale.  

How it protects majority shareholders 

Without a drag-along clause, even a single dissenting shareholder may create delays, or if the buyers want 100% ownership, cause a deal to fall apart entirely. 

From a majority shareholder’s perspective, particularly one who is also founder or lead investor, drag-along rights are about certainty and exit control.  

Sample drag-along clause

“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.” 

Let’s break it down:  

“Shareholders holding more than 50%…or combined shareholdings…more than 50%” 

 
This clause allows either a single shareholder with a majority stake or a group of shareholders who together hold more than 50% to trigger the drag-along.  

“Propose to sell all of their shares to a bona fide third-party purchaser” 

This means the clause only kicks in if the majority shareholders are selling all their shares to a genuine, independent buyer (not someone already involved in the company). It limits the clause to external exits, such as a trade sales or acquisitions. 

“The remaining shareholders…shall be required to sell” 

 
This is where “drag” mechanism comes into play. When the majority decides to sell and invoke the drag-along rights, minority shareholders must sell their shares too, even if they disagree with the sale. It ensures that once the majority has secured a buyer for the entire company, the sale can proceed in full.  

“On the same terms and conditions” 

This protects minority shareholders from being forced out on unfair or less favourable terms. Even though they have no choice in the sale, the clause ensures they receive the same price and deal terms as the majority, promoting fairness in the transaction. 

Tag-along rights 

In legal terms, a tag-along right allows minority shareholders to “tag along” when majority shareholders sell their shares to an external buyer. It gives the minority the option, but not the obligation, to sell their shares to the same buyer on the same terms and conditions. 

Think of it like dining at a table where the majority shareholder is served the main course first. If they decide to share their meal with someone else (the buyer), tag-along rights ensure that the minority shareholders also get to offer their portion to the buyer, whether it is the whole plate, or just a fair share of it. 

Often described as the ‘minority’s shield’ in a sale, tag along clauses are designed to ensure minority shareholders are not sidelined when the company changes hands. 

How they protect minority shareholders 

Tag-along rights ensure that 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 — or worse, cannot work with. 

Especially in private companies where shares are not publicly traded and finding a willing buyer is often difficult, this supports a fair and coordinated exit. 

Sample tag-along clause 

“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.” 

Let’s break it down:

“Shareholders holding more than 50%…or combined shareholdings…more than 50%” 

 
Where either a single shareholder with a majority stake or a group of shareholders holding more than 50% collectively propose a sale, this clause will apply.  

“Propose to sell all or part of their shares…and that (bona fide third-party) purchaser will become the majority shareholder” 

This clause is triggered when the proposed buyer is a genuine third party who will become the new majority shareholder after the deal – signalling a real shifts in control, unlike a routine share sale.  

“Each of the remaining shareholders… shall have the right, but not the obligation, to sell…” 
 

The minority shareholders shall have the option, but not the duty, to join the sale. This ensures they are not excluded when the company’s ownership changes.   

“A corresponding proportion of their shares, or the full amount…on the same terms…” 

If the majority is selling part of their shares, the minority can sell a proportionate part too. If the majority is selling all, the minority may sell all. Either way, they benefit from the same terms and pricing.  

“The Majority Shareholders shall be required to procure…” 

 
This puts a clear obligation on the majority to ensure the buyer agrees in advance to purchase the shares of tagging-along minority shareholders.  

“If the Majority Shareholders fail to do so, they shall not be entitled to transfer their shares…” 

This is the enforcement mechanism. If the majority fails to secure the buyer’s agreement, they cannot proceed with the sale, and this protects the minority from being left out.  

Venture capital: A textbook case for drag and tag along rights 

Drag and tag-along clauses are standard practice in venture capital (VC) term sheets and Shareholders’ Agreements as they align the interests of founders, early-stage investors, and incoming VC firms. 

As VC investments are made with an exit in mind, VC firms want drag-along rights that allow them to exit without being blocked by smaller shareholders when the time comes.  

Meanwhile, tag-along rights protect minority shareholders, typically early investors who no longer hold a controlling stake after several funding rounds. 

A well-known example of how these clauses operate in real life is the acquisition of WhatsApp by Facebook in February 2014.  

When the US$19 billion deal was on the table, drag-along rights reportedly allowed majority shareholders to compel minority shareholders to sell their shares on the same terms.  

Do you need drag and tag-along rights? 

Short answer: Only if they align with your commercial goals and company structure. 

Long answer: Maybe! Here’s a breakdown of practical advantages and potential drawbacks of each to help you assess if they belong in your Shareholders’ Agreement. 

Advantages of including drag-along rights: 

• let majority shareholders proceed with a full sale even if some shareholders object 

• straightforward exits for buyers seeking 100% ownership 

• gives investors’ confidence their exit rights can be executed without deadlock 

What to watch out for:   

• founders may be pulled into a sale if their shareholding drops below the threshold 

• vague thresholds or definitions can lead to misuse or unintended consequences 

• if improperly balanced, may overlook minority protections and create tension. 

Advantages of including tag-along rights: 

• minority shareholders can exit on the same terms as the majority 

• minority shareholders are not left behind when control of company shifts 

• useful in private companies where shares are not freely sold publicly 

What to watch out for:   

• investors may resist being bound to buy out smaller shareholders 

• if the buyer is not willing to acquire additional shares, it may block the entire deal 

• clear scope of applicability is required to avoid disputes 

Wrapping up 

Drag-along and tag-along rights are not boilerplate clauses, and the key lies in the detail–how the clauses are drafted, and who they are designed to protect, can make a significant difference.  

If you are considering how drag-along or tag-along rights should be structured to suit your position, we at ELP regularly advise on Shareholders’ Agreements across a range of industries, always with a focus on aligning commercial intent with clear, workable clauses.  

We would be glad to assist – get in touch with us today! 

FAQs on drag and tag-along rights

Question	Answer
Are there disadvantages to drag-along and tag-along rights?	Yes. Drag-along rights may force minority shareholders into a sale. Tag-along rights can limit majority shareholders’ flexibility or delay deals. Impact depends on drafting and interests.
How do pre-emption and drag-along rights relate?	Pre-emption rights protect existing shareholders’ stakes, while drag-along rights let majority shareholders force a sale. They should align to avoid conflicts.
What triggers drag-along clauses?	Usually, more than 50% ownership, though thresholds up to 75% exist.
Is non-cash consideration allowed in drag-along clauses?	Yes, if specified. The clause should define valuation, acceptance terms, and protections.
What’s the notice period for tag-along clauses?	Typically 10–30 days, or whatever is stated in the Shareholders’ Agreement.