What are Tag-Along and Drag-Along Rights?
A Tag-Along Right can give a Shareholder the choice to join another Shareholder’s qualifying sale. A Drag-Along Right can allow Shareholders who hold the percentage required by the Shareholders Agreement to require the other Shareholders to participate in a qualifying sale.
Why Do I Need to Know About Tag-Along and Drag-Along Rights?
Tag-Along and Drag-Along Rights are share sale and exit provisions commonly included in Shareholders Agreements. They set rules for a future sale of shares before the Shareholders know who may want to sell, who the buyer may be or whether the buyer will want part or all of the company.
They can answer two practical questions:
- If another Shareholder sells their shares, can I join the sale?
- If a buyer wants to purchase all of the shares, can the other Shareholders require me to sell?
The answer depends on the wording of the Shareholders Agreement. The ASX Entrepreneur’s Guide discusses Tag-Along and Drag-Along Rights in the context of Shareholders Agreements and future sales.
Example: Three Shareholders Receive an Offer
Assume a company has three Shareholders. Amelia owns 60%, Ben owns 25% and Chris owns 15%.
A buyer offers to purchase Amelia’s 60% holding. If the Shareholders Agreement gives Ben and Chris a Tag-Along Right for that type of sale, they can choose to exercise the right and include the number of shares permitted by the agreement in the sale.
Now assume the buyer wants to purchase 100% of the company, but Chris wants to keep his shares. The Shareholders Agreement says that Shareholders holding at least 75% of the shares can exercise the Drag-Along Right. Amelia holds only 60%, so she cannot exercise it alone. If Ben also agrees to the sale, Amelia and Ben together hold 85%. They meet the 75% requirement and, if the clause’s other requirements are satisfied, can require Chris to participate in the sale.
The example shows why the percentages in the Shareholders Agreement need to be tested against the company’s actual shareholdings.
The Same Offer Can Activate Different Rights
The result depends on the shares being sold and the requirements in the Shareholders Agreement.
Ben and Chris may be able to exercise their Tag-Along Rights and participate in the sale if the agreed trigger is satisfied.
Amelia cannot reach a 75% Drag-Along requirement alone. Amelia and Ben together hold 85% and can reach it.
What is the Difference Between a Tag-Along Right and a Drag-Along Right?
The main difference is who gets the right when a qualifying sale is proposed. A Tag-Along Right can give another Shareholder the choice to participate. A Drag-Along Right can allow Shareholders who satisfy the requirements of the clause to require the remaining Shareholders to sell.
These provisions are also sometimes referred to as tag and drag rights.
Tag-Along and Drag-Along Rights Compared
| Question | Tag-Along Right | Drag-Along Right |
|---|---|---|
| Who has the right? | The eligible Shareholder who wants to join another Shareholder's sale. | The Shareholder or group entitled to require the other Shareholders to join the sale. |
| Does the affected Shareholder choose? | The eligible Shareholder chooses whether to participate. | A valid exercise of the right can require the affected Shareholder to sell. |
| When is it useful? | Where a Shareholder wants the opportunity to sell if another Shareholder sells a significant interest. | Where a buyer wants to acquire all of the shares and the required Shareholders have agreed to the sale. |
| What does the agreement need to specify? | The trigger, eligible Shareholders, shares that can be included and sale terms. | The required percentage, qualifying sale, sale terms and process for requiring the other Shareholders to participate. |
When Can Tag-Along and Drag-Along Rights Be Exercised?
The Shareholders Agreement sets the circumstances in which each right can be exercised. There is no standard percentage that every Australian company must use.
A Drag-Along provision will often specify the percentage of shares that the Shareholders supporting the sale must hold before they can require the remaining Shareholders to participate. For example, if the agreement requires 75%, Shareholders who together hold at least 75% can satisfy that part of the clause.
The percentage needs to be considered against the company’s actual ownership. A 75% requirement has one effect where a single Shareholder owns 80% and another where the largest Shareholder owns 40%.
The agreement should also identify the sales covered by the provision. Depending on the drafting, this might include a sale of a controlling interest, a sale above a stated percentage or a transaction in which a buyer wants to acquire all of the shares.
Example: The Agreement Requires 75%
Amelia owns 60% and Ben owns 25%. The Shareholders Agreement requires Shareholders holding at least 75% to exercise the Drag-Along Right.
Amelia wants to exercise the right by herself.
60% is below the required 75%Amelia and Ben both support the qualifying sale.
85% satisfies the 75% requirementWhat Sale Terms Apply to a Tag-Along or Drag-Along Sale?
The Shareholders Agreement should state the terms on which the participating Shareholders sell their shares. This becomes particularly important under a Drag-Along Right because a Shareholder can be required to participate in the transaction.
Issues to consider include:
- the price payable for the shares;
- whether different share classes have different economic rights;
- cash, shares in the buyer or other forms of consideration;
- deferred payments and earn-outs;
- warranties the Shareholders must give;
- indemnities and liability under the sale agreement; and
- transaction costs.
A minority Shareholder who has not managed the company may know considerably less about its operations than a founder or executive Shareholder. A Drag-Along provision should therefore address the warranties and transaction liabilities that can be imposed on a Shareholder required to sell.
Published Australian agreements show how these issues can be dealt with in practice. An ASX-published Shareholders Agreement contains separate Tag Transaction and Drag Transaction provisions dealing with warranties, indemnities and obligations imposed on different Shareholders.
What Happens After a Tag-Along or Drag-Along Right is Exercised?
The agreement should provide a process for implementing the sale. Depending on the provision, the steps can include:
- giving notice of the proposed sale;
- identifying the buyer, price and material sale terms;
- allowing the relevant period for a Shareholder to exercise a Tag-Along Right;
- giving the notice required to exercise a Drag-Along Right;
- signing the sale and transfer documents; and
- completing the transfer of the shares.
The company’s Constitution and any applicable pre-emption or transfer provisions also need to be checked. ASIC’s guidance on company shares and Shareholders explains that Shareholder rights can arise under the Corporations Act, applicable Replaceable Rules, the Constitution and a Shareholders Agreement.
For the relationship between these documents, read Shareholders Agreement vs Constitution.
What Should a 50/50 Company Consider?
Where two Shareholders each own 50%, the percentage required to exercise a Drag-Along Right can determine whether either person can use the provision without the other.
If the agreement requires more than 50%, neither Shareholder can satisfy that percentage alone. A provision allowing a 50% Shareholder to exercise the right creates a different result because either owner may be able to reach the required percentage.
The clause needs to be considered with the other sale and exit arrangements applying to the two Shareholders. Read about the broader issues in a 50/50 Shareholders Agreement.
Does Every Shareholders Agreement Need Tag-Along and Drag-Along Rights?
The decision depends on the company’s ownership structure and the sale arrangements the Shareholders want to establish.
Before including the provisions, work through who should be able to exercise each right, the percentage required, the sales covered by the clause and the terms applying to participating Shareholders. Test those provisions against the actual shareholdings so the Shareholders understand who can exercise the rights alone and which Shareholders would need to act together.
Example of Tag-Along and Drag-Along Provisions in Practice
The Australian Takeovers Panel’s 2026 decision in Mobile Asset Holdings Ltd includes proposed Tag-Along and Drag-Along provisions applying to specified acquisitions and changes of control. Shareholders holding more than 50% could initiate the relevant mechanism under the proposed provisions.
The company involved was an unlisted public company with hundreds of shareholders, and the decision considered Australia’s takeovers regime, so the provisions should not be treated as a precedent for a proprietary company’s Shareholders Agreement. The example is useful because it shows how the percentage, transaction covered and process are defined by the particular provisions.
FAQs About Tag-Along and Drag-Along Rights
Can a minority Shareholder be forced to sell their shares?
A Drag-Along Right can require a minority Shareholder to participate in a qualifying sale where the requirements in the agreement have been satisfied. The clause should state who can exercise the right, the percentage required and the terms applying to the sale.
Can a minority Shareholder join another Shareholder’s sale?
A Tag-Along Right can give an eligible Shareholder the choice to participate in another Shareholder’s qualifying sale. The agreement determines when the right applies and which shares it covers.
Is there a standard percentage for a Drag-Along Right?
The percentage for a Drag-Along Right is set within the Shareholders Agreement. It should be tested against the company’s actual shareholdings to work out which Shareholders can reach it alone or together.
Does a Tag-Along Right mean I receive the same price?
The agreement determines the price and sale terms applying to a Shareholder exercising the Tag-Along Right. Different share classes or forms of consideration can require more detailed provisions.
Can one 50% Shareholder require the other to sell?
The answer depends on the percentage and other requirements in the Drag-Along provision. If the agreement requires more than 50%, one equal Shareholder cannot satisfy that percentage alone.
Do Tag-Along and Drag-Along Rights apply automatically?
The rights arise under the legal document that creates them, such as a Shareholders Agreement or Constitution. Their operation depends on the provision’s wording and the proposed transaction.
Need advice about Tag-Along and Drag-Along Provisions?
Blaze Business & Legal can draft a Shareholders Agreement for your business or advise on Tag-Along and Drag-Along provisions in an existing Shareholders Agreement.
Contact Rachelle Hare and ask her to review your provisions against the company’s actual shareholdings, the sales the provisions are intended to cover and the other relevant terms of the Shareholders Agreement.
