Drag-Along Right
A drag-along right lets shareholders holding a defined majority force the remaining shareholders to sell their shares to the same buyer on the same terms, so that a buyer who wants the whole company can get it without every small holder's consent. It is standard in venture and private equity documents, and it is the clause that decides whether a fintech with forty angel investors and an option pool can be sold at all.
- Also known as
- Drag-along, Drag right, Drag-along clause
- Used at
- shareholders' agreements and articles of association of venture-backed and private-equity-owned companies; invoked at a sale of the company
- Binding
- yes — the minority is contractually obliged to sell, and the articles usually let the company sign on their behalf if they do not
- Typical threshold
- a majority of the shares, often with a majority of the preferred shares and the board — investors want a drag they control, founders want one that cannot be used against them at a low price
- Typical protections for the dragged
- same price per share and same terms as the draggers; no obligation to give warranties beyond title to their own shares; sometimes a minimum price or a minimum return before the drag can be used
- Parties
- the majority who drag, the minority who are dragged, and the buyer, who will not sign without it
How a drag-along right works in practice
A buyer of a private company wants 100% of it: a stray 3% shareholder can block a merger, demand a premium or refuse to give the warranties the buyer needs. So the shareholders agree in advance that when holders of, say, 60% of the shares accept an offer, everyone else sells too. The clause names the threshold, the notice the minority receive, the terms they get — identical to the majority's, pro rata by class — and what they must sign. If a dragged shareholder refuses, the articles typically appoint a director as their attorney to execute the transfer.
The negotiation is about who controls the drag. A fund holding preferred shares with a liquidation preference may be happy to sell at a price that returns its money and leaves the common shares with nothing; founders therefore ask for a floor — the drag cannot be used below a price, or below a return to the ordinary shares — or for the board's approval, or for a founder majority within the threshold. Later rounds re-open the clause every time, because each new class wants to be able to drag and not to be dragged cheaply.
For a fintech buyer the drag matters twice: at signing, to be sure the whole company is delivered, and at the regulator, which approves the buyer as the sole controller only if the buyer will actually own everything.
Example
A fintech is sold for £30m. Its cap table: a Series A fund with 25% (1× preference on £6m), a seed fund with 12%, two founders with 40%, 22 angels with 15%, and an option pool of 8%. The drag requires 55% of all shares including the Series A investor. The founders and both funds accept — 77% — and the 22 angels are dragged: each receives the same £ per ordinary share, signs a short transfer and a warranty of title to their own shares, and nothing else. Two angels object that they were promised a 5× return; the clause has no floor, and they sell. Had the drag required only the preferred majority, the fund could have accepted £7m — its preference back plus a little — and dragged the founders into a sale that paid them almost nothing; the founder-negotiated 55%-of-all-shares threshold is why it could not.
Common mistakes
- A drag threshold the investors alone can reach, with no floor, so the founders can be sold out at the preference. - A drag that requires a threshold nobody can reach once the cap table has grown. - Dragged shareholders asked to give the same warranties as the sellers who ran the business. - No mechanism to sign for a holder who will not — a single refusal then stalls completion. - A buyer that relies on the drag without checking whether the shares it drags are subject to a tag-along the other way.