Clear Drag-Along Clause is Binding

Getting into business is easy. Getting out of business is often where the real problems start. That is why it makes sense to have a partnership agreement (or a shareholders’ agreement if the business is a company) in place from day one.

A shareholders’ agreement will normally have a ‘drag-along’ clause, which requires the other shareholder(s) to sell their shares to a third party wishing to acquire the whole of the business when a majority of the shareholders agree.

The decisions of the courts in cases concerning such clauses have resulted in their enforceability coming under question, but a recent case has provided relief for shareholders who may wish to rely on a drag-along clause.

It involved the owner-manager of a company who wished to acquire another company. He did not have sufficient funds to do so, so sought assistance from a private investor. They formed a new holding company for the purpose of buying out the target and the target was purchased. The two men created a shareholders’ agreement, which provided that in certain circumstances the investor could require the owner-manager to acquire his shares and, if he failed to do so, the investor could sell them to a third party.

The stipulated circumstances occurred and the investor sought to invoke the disposal of his shares under the drag-along clause. The owner-manager attempted to resist the transfer of the shares. However, because the drag-along clause was very tightly worded, it was straightforward for the court to conclude that it had been complied with in full.