Corporate Buy-out: TAG-ALONG Arrangement
Corporate Buy-out - Selling Shares - Forced to Sell - Buying out Shareholders - Buying into Company
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
A tag-along clause enables minority shareholders to sell their shares alongside a majority shareholder (or a specified group of majority shareholders) if the majority shareholder(s) decides to sell their shares in the corporation to a third party. As such, a tag-along provides protection to the minority shareholders from being left behind in a corporation from a change in control (share ownership), ensuring that the minority shareholders have the opportunity to exit the corporation on the same terms and conditions as the majority shareholder(s).
The tag-along clause takes effect when a majority shareholder (or specified group of majority shareholders) receives an offer from a third party to buy their shares, such that the majority shareholder(s) must then extend the same offer to the minority shareholders, allowing them to "tag along" on the sale. This ensures the minority shareholders receive the same price per share and other terms and conditions as the majority shareholder(s), preventing the majority shareholder(s) from selling their shareholding and leaving the minority shareholders with a less valuable, illiquid investment.
As such, where a corporation has both a majority shareholder (or a specified group of shareholders that constitute the majority) and one or more minority shareholders, with those shareholders having entered into a unanimous shareholders agreement with a typical tag-along clause, if a third party offers to buy the majority shareholder's majority stake in the corporation, the tag-along would preclude the majority shareholder from selling their shares alone. Instead, the third party would be necessitated to offer each of the minority shareholders the opportunity to sell their shares, at the same price and on the same terms, as part of the same transaction. This protects the minority shareholders, preventing the minority shareholders from being trapped in the corporation now controlled by a new party, and ensures that the minority shareholders get the same favorable exit opportunity as the majority shareholder.
The principal benefits that can be realized from the inclusion of a tag-along clause in the unanimous shareholders agreement include:
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Minority Shareholder Protection: The primary purpose of a tag-along is to safeguard the interests of minority shareholders by preventing a majority shareholder(s) from selling their shareholding at a high price and leaving the minority shareholders with a potentially devalued or illiquid investment.
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Equal Opportunity: A tag-along ensures that all shareholders have the same opportunity to exit the corporation and realize a return on their investment under the same terms.
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Transparency and Fair Dealing: A tag-along promotes transparency and fair dealings among shareholders, as it discourages a majority shareholder(s) from entering into a private transaction that is not in the best interest of the entire shareholder group.
For knowledgeable and experienced legal representation when initiating, or being subjected to, a corporate buy-out, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
