Tag along and drag along clauses: exit and drag rights

Quick answer. The tag along clause (co-sale right) lets a shareholder join a sale carried out by another, on the same terms and at the same price. The drag along clause (forced sale or drag right) lets a selling shareholder compel the others to sell too, on the same terms, in order to offer the buyer the whole of the share capital.

You are building your company with others, or you are about to bring in an investor. The shareholders' agreement comes up, and two English-named clauses appear every time: tag along and drag along. They look technical, almost secondary. Yet they decide what happens the day one of you wants to sell, or the day a buyer wants to acquire the whole company. Poorly calibrated, they block a sale or trap a minority shareholder. Well drafted, they organise liquidity for everyone.

This article explains what these two exit clauses really cover, where to place them (articles or agreement), how to draft them, and why an investor almost always requires them in a fundraising. With, in the end, the points we check in our structuring and fundraising files.

Before discussing the two clauses, we need to place their support. The shareholders' agreement is an extra-statutory contract. It organises relations between shareholders outside the articles of association: governance, information and, above all, the liquidity of the securities, that is, the conditions under which each one can enter and leave the capital.

The agreement has three features that drive everything else.

• It is confidential: unlike the articles, it is not published and is known only to its signatories.
• It has a fixed term: it is concluded for a defined period, often aligned with the investor's horizon or the life of the company.
• It has binding force between the parties: under article 1103 of the French Civil Code, a lawfully formed contract stands as law for those who concluded it. The agreement therefore binds its signatories, but them alone.

That last point weighs the most. The agreement binds only those who signed it. A shareholder who joins after signing, and has not acceded to the agreement, is in principle not bound by its clauses. Hence the practical importance of accession clauses, which require any new shareholder to join the agreement.

The tag along clause, or co-sale clause, lets a shareholder join a sale initiated by another. Concretely, when a shareholder (often the majority) sells their securities to a third party, the tag along beneficiary (often the minority) can require the buyer to purchase their own securities too, on the same terms and at the same price per security.

The aim is to protect the minority. Without this clause, they risk remaining captive alongside a new shareholder they did not choose, with a strategy and governance that are no longer the original ones. The tag along offers a way out: if the majority sells, the minority can sell with them, on the same terms.

Two drafting points make all the difference. First, the tag along can be full (the minority sells all their securities) or proportional (they sell in proportion to the stake sold by the majority). Second, it requires a notification procedure: the seller must inform the beneficiary of the proposed sale, its price and its terms, within a time frame allowing the right to be exercised.

Our reading. The tag along is the natural counterpart a minority shareholder asks for when they are required to accept a drag along. In our files, these two clauses are negotiated together: the minority agrees to be dragged into a global sale, on condition of being able to join any sale by the majority. It is a balance, not a one-sided favour.

The drag along clause, or forced sale obligation (also called a drag right), produces the opposite effect. It lets a shareholder, or a group of shareholders reaching a defined threshold, who sells their securities, compel the other shareholders to sell theirs too, on the same terms. The goal is to offer a buyer the whole of the capital, or a high percentage, without a minority shareholder being able to block the deal.

It therefore facilitates the global sale and the exit of investors. A serious buyer rarely wants 80 % of a company with a residual, uncooperative minority; they want 100 %, or near-total control. The drag along secures this possibility: if the sellers reach the agreed threshold, the others are dragged into the sale.

It is a powerful clause, and therefore framed by experienced negotiators. The dragged minority rarely agrees to sign a drag along without safeguards: a floor price, identical terms for all, and most often a mirror tag along. The drag along is not a blank cheque given to the majority; it is conditioned on a strict equality of treatment.

Tag along and drag along: the comparison#

The difference comes down to one sentence: the tag along is a right to follow the sale; the drag along is an obligation to undergo it. One protects, the other drags. Within the same agreement, they complement each other.

This is a recurring question, and the answer depends on the trade-off between flexibility, confidentiality and enforceability against third parties.

Most often, these clauses sit in the agreement. It is flexible to amend, confidential, and suited to commitments that may evolve over time. Its downside: it binds only its signatories and remains, in principle, unenforceable against third parties. A sale concluded in breach of the agreement is generally valid towards a good-faith third-party buyer; the wronged beneficiary then acts against the breaching signatory, most often for damages.

Inserted into the articles, these clauses become enforceable against third parties, but they are public and more rigid to amend. In the SAS, the statutory freedom opened by article L227-1 and the following articles of the Commercial Code allows certain clauses framing the transfer of shares to be set out in the articles. This is a more favourable ground than the SARL or the SA, whose articles are more constrained.

The underestimated risk. Many shareholders believe that a drag along clause written into the agreement is enough to force a sale. Yet, if the agreement stands alone and a shareholder refuses to sign the deed of sale, enforcement is not automatic: it often requires going to court, and the outcome depends on the drafting. The articulation of agreement and articles, and the sanctions provided, determine the real strength of the clause. A poorly secured drag along clause gives a false sense of protection.

An exit clause is only worth its drafting. Here are the points we systematically review when a client submits a draft agreement or term sheet.

1. The trigger threshold. From what percentage of a sale does the drag along activate? The threshold is negotiated case by case, depending on the capital breakdown and the investors' horizon. There is no universal standard threshold.
2. Equal price and terms. The clause must guarantee that all shareholders sell at the same price per security and on the same terms. This is the central counterpart of the forced sale.
3. The notification procedure and deadlines. Who notifies what, to whom, within what time frame? A vague procedure makes the clause hard to enforce when the day comes.
4. Articulation with pre-emption and approval. A pre-emption clause lets shareholders buy back in priority; an approval clause subjects a third party's entry to authorisation. Tag along, drag along, pre-emption and approval must follow on without contradicting each other.
5. Sanctions for non-compliance. Specific performance, penalty clause, damages: the clause must provide for what happens if a shareholder refuses to play along. Without a credible sanction, the clause loses its force.
6. The scope of securities covered. Ordinary shares, preference shares, securities giving access to capital: the clause must state precisely which securities are concerned by the exit.

Hayot Expertise tip. Never sign an agreement on the basis of the two clauses read in isolation. Tag along and drag along only make sense articulated with pre-emption, approval, liquidation preference and anti-dilution. It is the whole that forms a system. We always read these clauses together, not one by one.

In a fundraising, these clauses are not negotiable in principle. Investors almost always require the drag along: it guarantees them the ability to exit by selling 100 % of the capital the day a sale opportunity arises, without depending on the goodwill of founders or minorities. It is a structuring condition of their model, which rests on the eventual liquidity of their stake.

In return, the fund often grants the tag along to founders and minorities: if the investor or a majority sells, they too can join the sale. These clauses are negotiated at the time of the raise, together with the liquidation preference (which sets the order in which the sale price is recovered) and anti-dilution (which protects the investor against a fall in valuation). They form a coherent block that must be read together.

In practice. We supported a company whose sale to an industrial buyer almost fell through. A long-standing minority shareholder, not covered by a drag along, refused to sell their few per cent. The buyer, who wanted 100 %, threatened to withdraw. Unblocking it required a long renegotiation and a raised price for the minority. A drag along clause well drafted from the outset would have avoided this friction. Conversely, a minority without a tag along can end up stuck alongside a buyer they did not choose. The two clauses address the two sides of the same risk.

Company without an investor, between founders. Even with no fund in the capital, these clauses make sense. Between founding shareholders, the tag along protects each one if another sells, and the drag along facilitates a future global resale. Many incorporation agreements provide for them in advance.

SCI and wealth-holding companies. In a family or wealth-holding SCI, the logic of a sale to a third party is different, and the approval clause plays a central role there. Tag along and drag along are less frequent, but the question of the liquidity of the shares deserves to be raised when drafting the articles and the agreement.

Articulation with valuation. The price of a co-sale or forced sale refers to the value of the securities. When a threshold or a floor price is provided, its definition requires a clear valuation method. This is a point where our business valuation engagement secures the drafting, by setting a defensible price basis.

An agreement template found online will give a frame, but not the articulation specific to your situation. The trigger threshold, the balance between tag along and drag along, the choice between articles and agreement, the sequence with pre-emption and approval: all of this is calibrated against your project, your capitalisation table and your investors' horizon.

This is the logic of our legal advisory, which works alongside the accounting engagement to secure capital structuring. For companies that raise, our outsourced CFO for startups and SMEs support prepares the capitalisation table and the term sheet ahead of negotiation. And to place these clauses within the whole agreement, our guides on the choice between agreement and articles and on the reasons to draft a shareholders' agreement complete this reading. If you are preparing a raise, see also our markers for preparing a first fundraising and our overview of pre-seed and series A rounds. These clauses are particularly structuring for tech startups in their financing phase.

As a firm registered with the Order of Chartered Accountants of Ile-de-France, we regularly support capital structuring and fundraising operations, alongside legal counsel. This article informs on general principles; drafting a suitable agreement requires a review of your situation, your documents and the applicable law, and involves, where appropriate, a lawyer to draft the deed.