Meaning
Contractual agreements that compel minority shareholders to participate in the sale of a company secure the consent required for an acquisition. These drag along covenants prevent small shareholders from blocking a transaction that has been approved by the board and the majority of equity holders. By executing these provisions, the corporate leadership guarantees that a buyer can acquire one hundred percent of the outstanding shares.
Majority Rule
Strategic transactions often require unanimous shareholder approval to proceed smoothly. Without drag along covenants, a minor shareholder holding a fraction of a percent of equity could halt a multi-million dollar buyout by refusing to sell their shares. These clauses ensure that the will of the majority dictates the corporate destiny without obstruction from dissenting individuals.
The board can therefore negotiate with prospective buyers with the confidence that the equity can be delivered intact.
Exit Speed
Time is a sensitive variable in corporate acquisitions. When a prospective buyer extends an offer, the transaction must close before market conditions shift or the buyer loses interest. Drag along covenants eliminate the need for protracted negotiations with dozens of individual shareholders, allowing the transaction to proceed on a rapid schedule.
Minority Rights
Dissenting shareholders receive the same financial terms as the majority under these agreements. While they must sell their holdings, they receive the same price per share as all other investors of their class.
