Articles of Association: tag-along/drag-along
Tag-along and drag-along rights, in the form of standalone paragraphs to be included in the company’s Articles of Association.
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When do I use this document?
- for inclusion in the company’s existing Articles of Association
- for a private limited company incorporated in England and Wales
- in conjunction with a shareholder resolution to amend the Articles of Association see
What are the key features?
- tag-along rights process, including offer to minority shareholders to sell their shares to the buyer of a controlling interest in the company
- drag-along rights process, including service of a compulsory sale notice and completion of the dragged shareholders’ shares to the buyer
- definitions to be included in the Articles of Association
What else do I need to know?
Tag-along rights serve as protective shareholder rights for minority shareholders in a private limited company. Without them, minority shareholders have no ability to sell their shares if the controlling shareholder(s) sell their majority stake to a third party.
Tag-along rights operate as a restriction on the sale by controlling shareholders. As typically drafted, the majority shareholders cannot sell their shares unless the buyer extends an offer to purchase the minority shares at the same price per share.
The tag-along rights are elective rights of the minority shareholders – they can choose whether or not to sell their shares. Nevertheless, majority shareholders are concerned that a buyer may only acquire their shares if the buyer can also purchase shares held by any minority shareholder. To achieve this, majority shareholders usually include drag-along rights in the Articles of Association to ensure that their sale is not frustrated by a buyer’s inability to acquire the entire company.
Drag-along rights serve as protective rights for the majority shareholder(s) in a private limited company. They may not be able to find a buyer for their controlling interest in the company unless the buyer can also acquire shares held by any minority shareholder(s).
Drag-along rights usually operate by providing that, on a proposed sale by the majority shareholder(s), they can also require that any minority shareholder sells its shares to the same buyer at the same price per share.
When do I use this document?
- as an advance subscription agreement between the company and a single investor
- where the conversion price will be calculated as a percentage discount to the issue price for shares in the qualified investment round
- if agreed, where there is an agreed valuation cap on the company’s valuation
What are the key features?
- advance subscription terms and payment
- conversion on the occurrence of defined events, including a qualifying financing round, the sale of the company or on a longstop date
- conversion price on a qualified financing round to be at an agreed percentage discount to the qualified financing round share price
- if agreed, a cap on the valuation of the company for the purpose of calculating the conversion price
- warranties regarding the investor’s compliance with Financial Services and Markets Act 2000 regime regarding financial promotions
What else do I need to know?
For detailed discussion regarding the purpose of advance subscription agreements and their benefits and disadvantages for investors and the company, click here.
Negotiating points
Prior to entering into this ASA, the parties will need to consider and agree:
- discount rate: the discounted price per share (expressed as a percentage) at which the ASA investor will receive shares in the qualified financing round
- valuation cap: if agreed, the cap on the valuation of the company for the purpose of calculating the price at which the advance subscription will convert into shares on a qualified investment round
- default valuation: the default valuation of the company which will be used to calculate the conversion price of the advance subscription in circumstances where conversion occurs on the agreed longstop date or the company’s insolvency
- longstop date: the longstop date on which (and in the absence of a prior qualifying financing round) the ASA will automatically convert into shares
- qualified financing round: the minimum amount of funding which the company must raise before that funding round will count as the qualified financing round under the ASA which results in the conversion of the advance subscription into shares
- subscription amount: the amount of the investor’s advance subscription
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Updated by a lawyer on 30/06/2025
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