Drag-Along Clause Template (Copy, Paste & Adapt)

Drag-Along Right Clause (Sample):

If shareholders (including any director or founder) holding at least [75]% of the shares in the partnership, startup, or limited liability company agree to sell their shares to a third party, they may require all other shareholders (including minority shareholders and directors) to sell their shares to the same buyer, on the same terms and at the same price per share

What is a Drag-Along Clause?

A drag-along clause is a contractual provision that allows majority shareholders—often directors or founders in a partnership, startup, or limited liability company—to force minority shareholders to sell their shares if a specified majority agrees to a sale. This ensures that a buyer can acquire 100% of the company after incorporation, making the business more attractive and avoiding holdouts.

Who Needs It and Why?

• Best for: Majority shareholders, directors, and founders in startups, partnerships, and limited companies who want to ensure a clean exit.
  
  

• Key risk if missing: Minority shareholders or directors could block a sale, reducing the company’s value or scaring off buyers.
  
  

• Typical UK challenge: If not included in the shareholders’ agreement or articles of association, you cannot force a minority to sell.

How It Works in Practice

Example:
You’re a founder and director with 80% of a limited liability startup. A buyer wants to acquire the whole company, but a former employee with 5% refuses to sell. With a drag-along clause, you can require all shareholders—including directors and minority partners—to sell their shares on the same terms, ensuring the sale goes through.

Common Pitfalls and Legal Nuances

• The clause must be in the shareholders’ agreement or articles of association to be enforceable for any partnership, startup, or limited company.

• The threshold for triggering drag-along is usually 75% but can be set higher or lower.

• Adding a drag-along clause after a dispute or sale process has started can lead to “unfair prejudice” claims under UK law.

FAQ

1. Does a drag-along clause force all shareholders and directors to sell?
Yes, if the required majority agrees to a sale, all shareholders—including directors and minority partners—must sell on the same terms.

2. Can we add a drag-along clause to our partnership or limited company after incorporation?
It’s possible, but it’s best agreed before any sale discussions. Adding it during a dispute can be challenged in court.

3. Is a drag-along clause automatic in UK law for startups or partnerships?
No, it must be written into your shareholders’ agreement or articles of association.

4. What’s the difference between drag-along and tag-along?
Drag-along lets the majority force a sale; tag-along lets minorities join a sale if the majority sells.

5. Can a minority shareholder or director challenge a drag-along clause?
Yes, if it’s used unfairly or added after a dispute, they may claim unfair prejudice under the Companies Act 2006.

Summary / Action Steps

• Review your shareholders’ agreement and articles of association for a drag-along clause, especially if you’re a director, founder, or majority shareholder in a startup, partnership, or limited liability company.

• If missing, negotiate its inclusion before any sale discussions.

• Use the template above as a starting point, but adapt it to your company’s needs and structure.

Disclaimer: This content is for general information only and does not constitute legal, financial, or tax advice. Outcomes may vary depending on your individual circumstances.