Key points
- The tag-along clause, or joint exit clause (sortie conjointe), allows minority shareholders to sell their shares on the same terms as the majority shareholders when a third party buys the company.
- It prevents minority shareholders from being stuck with a new buyer they did not choose.
- For it to work properly, the shareholders’ agreement must define it clearly: proportional price, response period and terms of the transaction.
- The drag-along clause has the opposite effect: it obliges minority shareholders to sell their shares when the majority shareholder finds a buyer, most often for 100% of the share capital, on the terms set by the agreement.
- The pre-emption clause gives existing shareholders a priority right to buy before any offer is made to third parties.
- It gives minority shareholders an exit on the same terms as the majority shareholders, which strengthens the fairness and liquidity of their investment.
The sale of shares in a company can create imbalances for minority shareholders. You often fear being stuck with a new buyer you did not choose. The tag-along clause addresses this concern directly. It lets you benefit from the same sale terms as the majority shareholders. With this clause, you avoid being sidelined in major share sales.
Do you want to understand exactly how this clause works? Is your aim to protect yourself and plan a fair exit? This article breaks down the definition, the mechanisms and the benefits of this clause for minority shareholders. You will also find practical cases and tips on how to include it properly in a shareholders’ agreement. Protect your interests by understanding the legal tools available to you.
What is a tag-along clause?
The tag-along clause, also known as the joint exit clause (clause de sortie conjointe), allows minority shareholders to benefit from the same sale terms as the majority shareholders when a third party buys shares. In other words, if a majority shareholder wants to sell their shares, the minority shareholders have the right to “tag along” in the sale process and sell their shares on the same terms and conditions.
How tag-along rights work
The tag-along clause rests on joint action by the minority shareholders. When the majority shareholder decides to sell some or all of their shares, the minority shareholders can exercise their joint exit right. This ensures that minority shareholders also have a way out, without being stuck with a new owner they did not choose.
For this clause to be properly performed, it must be clearly defined in the shareholders’ agreement. The detailed terms, such as the proportional sale price, the time allowed to respond to the offer and the specific conditions of the transaction, must be set out so as to rule out any misinterpretation.
The different types of protective clauses
Besides the tag-along clause, other clauses are designed to protect the interests of minority shareholders and to organise governance within the company. Among them, the drag-along clause and the pre-emption clause are particularly noteworthy.
Drag-along clause
Unlike the tag-along clause, the drag-along clause, or joint exit obligation (obligation de sortie conjointe), obliges minority shareholders to sell their shares when the majority shareholder finds a buyer, most often for 100% of the share capital, on the terms set by the agreement. This makes it easier to sell the whole company, a sale that is often conditional on the buyer holding all the shares.
Pre-emption clause
This clause gives existing shareholders a priority right to buy the shares of a shareholder who wishes to sell, before those shares are offered to third parties. If the shareholders exercise this right, it limits the arrival of an unwanted new shareholder and preserves the stability of the shareholder base.
Why the tag-along clause matters in a shareholders’ agreement
Shareholders’ agreements play a fundamental role in the structure and governance of companies, particularly those with several categories of shareholders whose interests diverge. The tag-along clause helps prevent potential conflicts by giving minority shareholders a degree of justice and fairness in the face of decisions taken by the majority shareholders.
Benefits for minority shareholders
The tag-along clause offers minority shareholders many advantages. Above all, this mechanism gives them an assurance of transparency and fairness in major transactions. It provides a degree of liquidity, which investors need if they want to be able to exit their investments when necessary.
Protection against arbitrary decisions
Minority shareholders enjoy significant protection when control of the company is sold. The majority shareholder can no longer sell their shares to a third party without offering them the option to exit on the same terms. The tag-along clause thus gives minority shareholders the benefit of the terms negotiated by the majority shareholder.
Building trust
The tag-along clause strengthens trust between shareholders: minority shareholders know they will not be left out of a sale of control negotiated by the majority shareholder. This transparency and these assurances contribute to a calmer, more balanced business climate.
| Aspect | Tag-along clause | Drag-along clause |
|---|---|---|
| Trigger | Voluntary, by the minority shareholders | Mandatory, by the majority shareholders |
| Main purpose | Protect minority shareholders | Facilitate the sale of the whole company |
| Type of exit | Joint exit | Obligation to sell |
Applying and drafting the clauses
To include a tag-along clause properly in a shareholders’ agreement, careful drafting is essential. The wording must be clear and precise to avoid any confusion or future dispute. Each clause must come with detailed conditions submitted for approval by all the parties concerned.
Practical tips
- Carry out a thorough legal review of the existing articles of association and agreements to identify each shareholder’s specific needs.
- Consult a lawyer regularly to adapt the clauses to regulatory and commercial developments in your sector. You can also explore other protective clauses such as the ratchet clause to better understand all the options available.
- Put monitoring mechanisms in place to ensure that the clauses in the agreement are properly applied.
Legal references
In France, the drafting and application of such clauses fall mainly under freedom of contract, enshrined in Article 1102 of the French Civil Code (Code civil) (in French): everyone determines the content of the contract within the limits set by law. The agreement has the force of law between those who signed it (Article 1103 of the Civil Code (in French)), but it creates obligations only between its parties (Article 1199 of the Civil Code (in French)). The French Commercial Code (Code de commerce) covers certain specific points relating to company articles of association and the rights of minority shareholders.
Each shareholders’ agreement, although freely drawn up, must therefore comply with the general principles of commercial law. Where the shares are admitted to trading on a regulated market, any clause providing for preferential terms for the sale or purchase of at least 0.5% of the share capital or voting rights must be sent to the company and to the French Financial Markets Authority (Autorité des marchés financiers, AMF) within five trading days (Article L. 233-11 of the Commercial Code (in French)). Failing this, its effects are suspended during a public offer period.
How a tag-along clause affects a company’s valuation
A company whose shareholders’ agreement includes a tag-along clause may reassure more investors. They see it as protection for their future rights. This perception can make the company more attractive during a fundraising round.
