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What are Tag Along Rights in shareholder’s agreement?

What does Tag Along Right mean?

Tag Along Right, as the term suggests, means the right of the investor to tag along with the Founder, if the Founder proposes to sell his stake to any third party. 

How are these conditions imposed?

Where the Founder intends to sell his stake (full or part), the Founder would be under an obligation to make an offer to the Investor (the ROFR right). As explained for ROFR, if the investor does not express interest in buying the shares from the Founder, the Founder may sell his stake to a third-party.

At the time of selling shares to the third-party, the tag-along right will be invoked, under which the Founder shall inform the investor about such offer and provide an option to the investor to sell his stake along with the Founder. 

If the investor accepts the tag-along option, it shall be the obligation of the Founder to sell the entire shares (his stake as well as the investor’s) to the third-party. The only obligation on part of the investor is to express his interest within the period specified in the tag-along offer document.

If the investor does not express his interest within the specified time, it can be assumed that the investor is not desirous of selling his stake. In such a case, the Founder may proceed and sell his stake in the company to the third-party investor. 

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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