Both drag along rights and tag along rights can be very beneficial in an LLC Operating Agreement or a corporation’s Shareholder Agreement. They both relate generally to when an owner (or a group of owners) holding a certain percentage of the equity of a company (usually a majority) wish to sell their interests in the company to a third party. Tag along rights are beneficial to minority owners, while drag along rights are beneficial to majority owners.
The way they work is that if drag along rights are given, if the owner(s) of a majority of the equity in the company desire to sell their interests to a third party, then they can exercise their right and “drag” the other owners along into the sale with them – which forces them to sell their interests to the third party buyer.
If tag along rights are granted, then if the owner(s) of a majority decide to sell their interests to a third party, then the rest of the owners have the right to tag along, and if they exercise this right, the third party purchaser has to purchase their interests on the same terms as the majority owner’s. If the minority owners exercise their tag along right and the purchaser does not buy their equity, then the purchaser will be prohibited from purchasing the majority owner’s equity.
Generally when one owner of equity in a company attempts to sell the equity the other owners of the company will have a right of first refusal that they can exercise to buy the selling owner’s equity. If that right of first refusal is not exercised then the tag along or drag along rights can be exercised. If both tag along and drag alone rights exist then usually the minority owners have the right to tag along first, and if they decline, the majority owner then has the right to drag them along. That’s why setting the ownership percentage at which each right can be exercised is important. Minority owners may be able to tag along if 51% or more is being sold, but they may be subject to being dragged along if only 50% or more is being sold.