DealLawyers.com Blog

December 5, 2016

Drag-Along Rights: Best Practices & Key Issues

This Gibson Dunn memo takes a deep dive into issues surrounding the negotiation & drafting of drag-along rights.  Here’s an excerpt from the intro:

Drag-along rights, or drag rights, which give the majority owner of a company the right to force minority owners to participate in a sale of the company, can be a fiercely negotiated provision in a company’s governing documents.  These provisions implicate the rights a majority owner and minority owner will have in a future sale transaction, which could be years down the road and to an unknown buyer.

Many may view these provisions simply as a measure to get the parties to the negotiating table later in the event of a sale rather than as a measure to actually effect a sale, which means they are not troubled by the details or mechanics of drag-along provisions.  While this view may have merit, the relative leverage of the parties at that subsequent negotiating table may hinge on the relative strength of each party’s rights under the drag provisions.  As a result, it is important to pay careful attention to these provisions.

The memo reviews potential pitfalls, as well as best practices, that should be considered when negotiating drag rights.

John Jenkins