PIGGY-BACK RIGHTS in a SHAREHOLDERS AGREEMENT

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There are many intriguing clauses that can be found in unanimous shareholders agreements, especially when you are lawyer that has been looking at shareholders' agreements for over 25 years, and have seen the inclusion (and exclusion) of contractual provisions such as "piggy-back rights." In a shareholders' agreement, "piggy-back rights" are a contractual arrangement that can have two distinct meanings, depending on the context:

• Tag-Along Rights (Co-Sale Rights): This is the most common use of the term "piggy-back rights" in the context of private corporation shareholders' agreements. Tag-along rights are intended to protect minority shareholders. If a majority shareholder receives an offer to sell their shares to a third party, the piggy-back (or tag-along) right allows the minority shareholders to "piggy-back" on that sale. This means the minority shareholders can sell their shares on the same terms and conditions as the majority shareholder, and often on a pro-rata basis.

  • Purpose: Tag-along rights are a crucial protection for minority shareholders. Tag-along rights ensure the minority shareholders are not left behind if the coroporation's control changes hands. It also prevents a majority shareholder from selling their stake and leaving the minority shareholders with a new, potentially less desirable, business partner.

  • Distinction as between Piggy-back Rights (Tag-Along) versus Drag-Along Rights:

    • Piggy-back/Tag-along: Protects minority shareholders. It gives them the right to join a sale.

    • Drag-along: Protects majority shareholders. It gives them the right to force minority shareholders to join a sale. This is useful when a buyer wants to acquire 100% of the company, and the majority shareholders need to compel the minority to sell their shares to complete the deal.

  • Distinction as between Piggy-back Rights (Tag-Along) versus Right of First Refusal (ROFR):

    • Piggy-back/Tag-along: Applies when a majority shareholder is selling to a third party. It allows the minority to sell their shares to that same third party.

    • ROFR: Applies when any shareholder wants to sell their shares to a third party. It gives the other shareholders the right to buy the shares themselves before the third party has the opportunity. This helps existing shareholders maintain control of the corporation and avoid new partners.

• Piggy-back Registration Rights: This term is typically used in the context of publicly traded companies or those planning to go public. Piggy-back registration rights are a contractual right for an investor to have their securities registered with the appropriate securites authority so they can be sold to the public.

  • How it Works: Piggy-back registration rights allow an investor to "piggy-back" on a public offering of securities initiated by the corporation itself or by another investor. They do not have the right to force a public offering (this is called a "demand registration right"), but they can join one that is already happening. This is considered an "inferior" right to a demand right, as the holder cannot control the timing of the sale.

  • Purpose: Piggy-back registration rights provide a way for investors to sell a large number of their shares to the public without violating securities laws.

For knowledgeable and experienced legal representation in negotiating, drafting and reviewing unanimous shareholders agreements, and other essential business contracts to the advancement of your commercial endeavors, contact our law firm by email at Chris@NeufeldLegal.com or by telephone at 403-400-4092 / 905-616-8864.

 

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