Clear Drag-Along Clause is Binding

Getting into business is easy. Getting out of business is often where the real problems start. That is why it makes sense to have a partnership agreement (or a shareholders’ agreement if the business is a company) in place from day one.

A shareholders' agreement will normally have a 'drag-along' clause, which requires the other shareholder(s) to sell their shares to a third party wishing to acquire the whole of the business when a majority of the shareholders agree.

The decisions of the courts in cases concerning such clauses have resulted in their enforceability coming under question, but a recent case has provided relief for shareholders who may wish to rely on a drag-along clause.

It involved the owner-manager of a company who wished to acquire another company. He did not have sufficient funds to do so, so sought assistance from a private investor. They formed a new holding company for the purpose of buying out the target and the target was purchased. The two men created a shareholders' agreement, which provided that in certain circumstances the investor could require the owner-manager to acquire his shares and, if he failed to do so, the investor could sell them to a third party.

The stipulated circumstances occurred and the investor sought to invoke the disposal of his shares under the drag-along clause. The owner-manager attempted to resist the transfer of the shares. However, because the drag-along clause was very tightly worded, it was straightforward for the court to conclude that it had been complied with in full.

Such clauses should always be worded in clear and unequivocal language, so that there is no room for doubt as to whether or not the conditions that trigger the drag-along clause have been met.

For assistance in all agreements between partners, shareholders or investors, please contact Roger Sands on 01752 292316.

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