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FREQUENTLY ASKED QUESTIONS/TECHNICAL CLAUSES - Tag-along & drag-along: what do I need to get started?/

Entrepreneurs

Tag-along & drag-along: what do I need to get started?

The tag-along is a legal clause, usually included into in your shareholders agreement providing that if one of the shareholders wishes to sell all or part of its shares to a third party, the other shareholders have the right to sell also in proportion to their shares held, under the same conditions and at the same price. There are as many clauses of tag-along as there are businesses, from the simplest to the most complex.

We believe that this clause is important at launch to prevent one of the shareholders from selling shares on the side, to the detriment of the rest of the team. It provides for simple notification and good faith negotiation in the event of conflict.

On the other hand, the drag-along clause is more dangerous. It allows a minority shareholders to be forced to sell its shares if the majority of the company's shares are put up for sale.

This clause is highly appreciated by investors in the shareholders agreement because it protects the interests of the company when it is ‘mature', but it is perfectly useless at launch because the company's value is de facto very weak. Indeed, an investor could make an attractive offer (but far from the future value envisaged by the shareholders) to one of the majority shareholders who, if they accepted, would force everyone to sell.

This is why Alf's documents proposes a simple and easy to implement tag-along clause.

Other options available on our website: 

 

What is the preferential subscription right or maintenance right?

The preferential subscription right is applicable to any stock company (notably SAS and SA). It refers to the right that enables any shareholder to subscribe before anyone else for new shares in the event of a capital increase, i.e. when new shares are issued.

 

 

Sometimes, in the event of a capital increase, some shareholders are not able to take part in it financially. In this case, the shareholder is likely to find his holdings diluted. This means that his participation in the share capital of the company has decreased proportionally to the capital increase. The maintenance right (also known as the anti-dilution clause) enables this type of shareholders to take part in the capital increase. The drafting of this clause can anticipate two things.

 

  • The shareholder that benefits from this clause will be able to subscribe for the number of shares that will be sufficient to keep his level of participation in the share capital.
  • The shareholder will be able to benefit from his maintenance right and will be able to subscribe for more shares than necessary in order to keep his level of participation in the share capital of the company if the anti-dilution clause provides for the case when the shareholders wants to subscribe for the number of shares in proportion to its share in the company.`

 

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