Tag along and drag along clauses in shareholders’

agreements

In our two previous “PwC Legal booklets” dedicated to shareholders’ agreements 1, we briefly described
the main contractual clauses intended respectively to (a) restrict the transferability of the shares of a
company, namely inalienability clauses, approval clauses and pre-emption clauses and (b) ensure the
maintenance of a company's share capital structure, namely stand-still clauses, anti-dilution clauses
and ratchet clauses, as well as the main legal rules governing them under Luxembourg law.
Restricting the transferability of shares and ensuring the maintenance of the capital of a company are
of course two important elements for the latter and its shareholders. However, there is a third element
that is equally important in this context, which consists in organising a right and/or obligation to withdraw
in whole or in part for all or some of the company's shareholders in certain circumstances.
Several contractual clauses, the validity of which is generally accepted by both Luxembourg doctrine
and case law, pursue such an objective. Examples include option clauses 2, exclusion clauses,
withdrawal clauses, initial public offering clauses or joint selling clauses of the company3.
The most common clauses - or at least the most frequently encountered and applied in practice -
intended to organise a right or obligation (total or partial) for shareholders to leave a company are (a)
the so-called tag along clauses and (b) the drag along clauses.
We will deal below with these two types of clauses, whose legal subtleties are not always fully
understood in practice, in order to give parties who wish to use them a better knowledge of their purpose
and functioning.
The purpose of tag along clauses 4 is to allow one or more shareholder(s) of a company 5 (the
"Beneficiary(ies)") to transfer, if it/they wish(es) so, all or part of the shares it/they hold(s) in a company
at the same time as one or more other shareholder(s) (the "Transferring Shareholder(s)") who have
decided to transfer all or part of its/their shares to a purchaser (the "Purchaser").6 In more general
terms, it is therefore a right (and not an obligation) of the Beneficiary(ies) to transfer all or part of its/their
shares in a company at the same time - and most frequently on the same financial terms - as the
Transferring Shareholder(s) transfer(s) its/their own shares to the Purchaser. This explains in particular
why tag along clauses are so frequently referred to, particularly in Belgian law, as a “droit de suite”
(translating literally as a right to follow) 7, which seems to be their best denomination in French.
Where they may appear misleadingly easy to draft, tag along clauses present multiple variants and
complexities. The drafting of these clauses requires the determination of several conditions related, on
the one hand, to the triggering of such clauses, and on the other hand, to their implementation.

1
This terminology refers to any partnership agreements or shareholders’ agreement of a company.
2
Whether call options, put options, crossed options or options organised to as to form a « buy or sell » clause.
3
Which will not be dealt with in this « PwC Legal booklet », but will be ultimately considered in one of our forthcoming booklet
dedicated to contractual clauses in shareholders’ agreements preventing or remedying to long-term conflict between
shareholders.
4
Also qualified in French as “clause de remorquage”.
5
Who usually are minority shareholders.
6
Who usually are majority shareholders.
7 1
It must be noted that in France, the notion of « droit de suite » however generally refers to the possibility for a seller to be paid
an additional price in the event of a transfer by the initial transferee of shares acquired from the seller to a third party at a higher
price in a certain period of time following the initial transfer.

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In this document, “PwC Legal” refers to PwC Legal, SARL which is a member firm of PricewaterhouseCoopers International Limited («PwC IL»), each member firm of which is
a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.
 Without this list being exhaustive, the author, beneficiary or debtor of a tag along clause, must therefore,
at the very least, take a position on the following main elements during its drafting and negotiation:
 triggering threshold: the tag along clause must specify whether it may be triggered by its
Beneficiary in the event of a transfer by the Transferring Shareholder of any of its shares or only
of a certain percentage of its shares8;
 proportional nature: the tag along clause must specify whether, at the time of its implementation,
its Beneficiary may simultaneously transfer to the Transferring Shareholder all its shares in the
company9 or only a number of shares proportionally identical to those transferred by the
Transferring Shareholder10;
 allocation of the shares transferred: the tag along clause must also organise what will happen if,
in the event of the exercise of the tag along right, the Purchaser refuses to increase the number
of shares it initially planned to acquire11;
 nature of the Transferring Shareholder's obligation: the tag along clause should clarify the precise
obligation devolved to the Transferring Shareholder in the event the Beneficiary exercises its tag
along right; several degrees of obligation are conceivable:
o obligation of the Transferring Shareholder to directly purchase the Beneficiary's relevant
shares, provided that it subsequently retransfers them (or not) from the Purchaser12;
o obligation of best efforts (“obligation de moyen”) or procurement (“porte-fort”) of the
Transferring Shareholder to ensure that the Purchaser will simultaneously also acquire
the relevant shares of the Beneficiary, with (or without), in case of default by the
Purchaser, a prohibition for the Transferring Shareholder to transfer its own shares
(unless it acquires itself the relevant shares) 13;
o obligation of result (“obligation de résultat”) of the Transferring Shareholder to ensure
that the Purchaser will acquire the relevant shares of the Beneficiary at the same time
as its own shares with, in case of default by the Purchaser, an obligation for the
Transferring Shareholder to purchase itself the relevant shares of the Beneficiary or to
pay it a fixed allowance....
 financial conditions of the transfer: the tag along clause must specify at which price its Beneficiary
may transfer its shares concurrently with those of the Transferring Shareholder; this will generally
be the same price as that offered by the Purchaser to the Transferring Shareholder ; however, it
could be agreed otherwise, for example in case that the price offered does not seem to be in good
faith;

8
Being cautious in specifying whether the clause will only play for example in the event of the transfer of an interest amounting
to X% or more of the shares or more generally in the event of a transfer in one or several occasions to the same Purchaser of
X% or more shares over a determined period of time.
9
Therefore called a total tag along right.
10
Therefore called a proportional tag along right.
11
In this case, parties could effectively provide that, for example, the Transferring Shareholder shall waive the transfer of its
shares to the Purchaser or that the number of shares contemplated to be sold initially to the Purchaser shall be reduced so that
the Beneficiary could proportionally sell the same numbers of shares as theirs.
12
Which could be legally secure by a put option granted by the Transferring Shareholder to the Beneficiary regarding the shares
concerned.
13
Analysed by some authors of doctrine as « a promise whereby the seller guarantees to the beneficiary of such clause the
2
purchase of its shares by the third party. If the latter agrees to ratify, it takes on the promisor’s commitments who therefore is
released. If it disagrees, only the promisor will be held liable and the beneficiary of the clause will only obtain damages, to the
exclusion of any forced execution. ».

PwC Legal, SARL, Société d’avocats indépendante inscrite au Barreau de Luxembourg - membre du réseau PwC
2, rue Gerhard Mercator, L-2182 Luxembourg
T: +352 26 48 42 1 - F: +352 26 48 42 35 00 - E: [email protected] - www.pwclegal.lu
TVA: No. Lu 25463506 - R.C.S. Luxembourg B 169476
© 2019 PwC Legal, SARL. All rights reserved.
In this document, “PwC Legal” refers to PwC Legal, SARL which is a member firm of PricewaterhouseCoopers International Limited («PwC IL»), each member firm of which is
a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.
  other conditions of the transfer: the tag along clause must specify which representations and
warranties shall or shall not be given by the Beneficiary to the Purchaser in relation to the transfer
of its shares; it must also specify, in case of such representations and warranties, how these will
be granted to the Transferring Shareholder (e.g. individually, severally and jointly ...) and their
possible limitations.
Tag along clauses are most frequently found in shareholders’ agreements concerning joint ventures or
management buy-outs. They confer on shareholders’ relations an increased intuitu personae character,
the Beneficiary indicating that its presence in the company is directly linked to the presence of the
Transferring Shareholder. By their nature, tag along rights are generally granted to minority
shareholders. However, they often have as indirect effect to complicate (depending on their wording and
Beneficiary(ies)) the transfer of the shares of the company by the Transferring Shareholder(s) having
agreed to grant them14.
Drag along clauses or “obligation de suite” clauses impose - contrary to tag along clauses - on one or
more shareholder(s) (generally minority shareholder(s)) of a company (the "Compelled
Shareholder(s)") to transfer all or part of its/their shares of a company to a buyer (the “Buyer”) at the
same time as one or more other majority shareholder(s) (the "Beneficiary(ies)"), if it/they require(s) so.
In more general terms, these clauses give its/their Beneficiary(ies) a right (but no obligation) to oblige
the Compelled Shareholder(s) to transfer its/their own shares at the same time and generally on the
same terms as its/theirs. They impose, in other words, an “obligation to follow” on the Compelled
Shareholders.
The purpose of these clauses is thus mainly to enable its/their Beneficiary(ies), if it/they find(s) a Buyer
interested in acquiring all the shares of the concerned company, to facilitate the sale of its/their shares
by avoiding having to deal with the expectations of one or several minority shareholder(s) and by
excluding the risk of suffering a discount on the price offered by the potential Buyer who could not buy
the entire share capital of the company. These clauses are common in private equity transactions where
the (majority) financial shareholder(s) ultimately want(s) to ensure an exit from the capital.
The important points during the negotiation and drafting of drag along clauses are identical to those
described above with regard to tag along clauses, with the following particularities:
 triggering threshold: the drag along clause can generally only be implemented in case of an offer
received by a Buyer to acquire 100% of the company's shares15; in certain specific cases and
circumstances, the drag along clause may not be applied before the expiration of a certain period
of time;
 proportional nature: the drag along clause will generally not be proportional; it will quasi-
systematically and indivisibly cover all the shares of the Compelled Shareholder(s)16;
 nature of the Compelled Shareholder's obligation: the drag along clause must specify the precise
obligation devolved to the Compelled Shareholder in case of the triggering of the drag along
clause; for example, the obligation to transfer its shares to the Beneficiaries or directly to the
Buyer, whether or not guaranteed by a (transferable) call option mechanism in favour of the
Beneficiary...

14
Because they will commit the Purchaser to purchase more shares than initially agreed if it wants to complete a transfer with
the Transferring Shareholder, or because the Beneficiary could be a key person of the Company that the Purchaser would like
to maintain in the share capital upon entrance, whereas this entrance will permit to the Beneficiary to withdraw as the case may
be.
15 3
This being said, a drag along clause could (very) theoretically be practicable as soon a Buyer would make an offer to
purchase a number of shares higher than those owned by the Beneficiaries.
16
This being said, a proportional drag along clause could also be theoretically practicable.

PwC Legal, SARL, Société d’avocats indépendante inscrite au Barreau de Luxembourg - membre du réseau PwC
2, rue Gerhard Mercator, L-2182 Luxembourg
T: +352 26 48 42 1 - F: +352 26 48 42 35 00 - E: [email protected] - www.pwclegal.lu
TVA: No. Lu 25463506 - R.C.S. Luxembourg B 169476
© 2019 PwC Legal, SARL. All rights reserved.
In this document, “PwC Legal” refers to PwC Legal, SARL which is a member firm of PricewaterhouseCoopers International Limited («PwC IL»), each member firm of which is
a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.
  financial conditions of the transfer: the drag along clause must specify at which price the
Compelled Shareholders will be forced to transfer their shares at the same time as those of the
Beneficiaries (i.e the market price, obtained according to a procedure for placing the company on
the market described in the shareholders' agreement and usually involving the intervention of
financial intermediaries); this will generally be the same price as the one offered by the Buyer for
the Beneficiaries’ shares; however, depending on the circumstances, it is quite regularly agreed
on a determinable price to be decided by an expert in case of a dispute of the good faith nature
of the price proposed by the Buyer or even a floor price ;
 other conditions of the transfer: the drag along clause must specify which representations and
warranties shall be given or not by the Compelled Shareholder(s) to the Buyer in connection with
the transfer of its/their shares; it must also specify, in case of such representations and warranties,
how these will be granted by the Compelled Shareholders (e. g. individually, jointly and severally
between them, jointly and severally with the Beneficiaries...) and their possible limitations. The
drag along clause will also generally specify that the Buyer may not be an affiliate of the
Beneficiary in order to compensate for a bad faith triggering of this mechanism and to avoid a
squeeze-out of the Compelled Shareholder (in principle a minority shareholder).
It should be pointed out in conclusion that both in the case of tag along clauses and drag along clauses,
the practice in Luxembourg consists largely in "duplicating" such clauses in the company's articles of
association, with the obvious aim of making them enforceable against third parties and thus protecting
their Beneficiaries against any attempts to circumvent their object. Finally, these clauses are naturally
subject to the general principles of Luxembourg company law, such as approval in case of a transfer of
shares to a non-shareholder third party, or the principle that the non-execution of an obligation to perform
is in principle resolved in damages, so there will be no guarantee for example that a judge will order the
forced execution of a drag along clause.

CONTACT

Jean-Philippe Smeets Mélissandre Demarcq

Partner | Head of M&A Junior Associate
[email protected] [email protected]
T: +352 26 48 42 35 63 T: +352 26 48 42 35 90

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PwC Legal, SARL, Société d’avocats indépendante inscrite au Barreau de Luxembourg - membre du réseau PwC
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T: +352 26 48 42 1 - F: +352 26 48 42 35 00 - E: [email protected] - www.pwclegal.lu 4
TVA: No. Lu 25463506 - R.C.S. Luxembourg B 169476
© 2019 PwC Legal, SARL. All rights reserved.
In this document, “PwC Legal” refers to PwC Legal, SARL which is a member firm of PricewaterhouseCoopers International Limited («PwC IL»), each member firm of which is
a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.