Drag-along right
The right of a majority or specified group to compel minority shareholders to join a sale of the corporation.
| Triggering threshold | Often: majority of preferred + majority of common |
|---|---|
| Sometimes adds | Board approval requirement |
| Coverage | All non-consenting shareholders, including common and employees |
| Terms | Same per-share consideration as the consenting majority receives |
Why drag-along exists
In a private corporation with many small shareholders, a single holdout can block an M&A transaction. Acquirers typically demand 100% of the shares (or close to it) to acquire clean title and avoid lingering minority interests in the post-acquisition entity. A holdout with even 1% of the shares can force renegotiation, demand a side payment, or simply prevent the deal from closing.
The drag-along solves this. When the defined majority approves the sale, the drag forces the remaining shareholders to participate. The transaction can close on a clean cap table without per-shareholder negotiation.
The standard structure
A modern drag-along clause typically requires:
- Threshold approval: often a majority of preferred plus a majority of common, sometimes with the board joining (board + holders of a majority of common voting as a single class).
- Bona fide sale to a third party: the drag applies only to genuine third-party sales, not to sales to insiders or affiliates.
- Same consideration: dragged shareholders receive the same per-share consideration as the consenting majority.
- Limited obligations: dragged shareholders bear obligations pro rata, not more.
- Required cooperation: dragged shareholders must sign customary transaction documents, vote in favour, and waive appraisal or dissent rights.
Drag and dissent rights
Statutory dissent or appraisal rights (DGCL § 262, CBCA s. 190) entitle dissenting shareholders to receive the fair value of their shares determined by a court. A well-drafted drag-along requires the dragged shareholders to waive these rights in the transaction, since dissent and appraisal can undermine the certainty of consideration that a drag is designed to deliver. Whether such a waiver is enforceable depends on jurisdiction and the wording of the underlying agreement; counsel typically structures the drag carefully to maximize enforceability.
Octelligence captures drag-along thresholds and parties per shareholder agreement, surfaces them at M&A planning time, and helps confirm whether the threshold is met before the transaction is signed.
See Digital Corporate RecordsPer-class voting thresholds tracked alongside the share register, so the math is provable.