Tag along right
Tag along right / Mitveräußerungsrecht
October 18, 2022
The tag along right (or joint sales right) is a regulation under company law that can be found in articles of association or participation agreements. The right of joint-sale is often also referred to in German-speaking countries by the English-language term tag-along or co-sale right. It is the counterpart to the drag-along right.
Function of the joint-sale right
The right of co-sale gives other shareholders (sometimes only certain ones, such as investors) the opportunity to participate in a good sale of shares by a selling shareholder. The English "take-along", which can be translated as "to participate", makes it clear what it is all about: The regulation opens up the possibility for other shareholders under waiving any pre-acquisition rights or purchase rights to demand own participation in the sale from the shareholder willing to sell. They should have the opportunity to offer their shares pro rata on the same terms as those of the seller. In this way, investors want to protect themselves against founders or other senior shareholders leaving the company without them and missing out on a good deal.
If the buyer does not wish to purchase all shares, there are various options. It is often agreed that the sale will then take place in proportion to the respective percentage share in the company's capital. In some cases, the sale may not take place.
Like the right of first refusal, the right of joint-sale is intended to prevent individual shareholders from leaving the company without the others participating.
In participation agreements, it is often referred to as a tag-along right, joint-sale right or co-sale right - a one-sided, investor-friendly right that is intended to protect the investor from a founder solo effort. In some cases, the founders are not granted the same right.