Meaning
Legal provisions enable a majority of shareholders to compel the remaining minority to participate in the sale of the company. Use of drag along rights ensures that a single small shareholder cannot block a merger or acquisition that the majority has approved. The minority shareholders must accept the same terms and price as the majority group.
Forfeiture Power
Majority holders trigger this clause to deliver one hundred percent of the equity to a buyer.
Majority Control
Exercise of this right typically requires a specific threshold of votes as defined in the shareholder agreement. The language specifies the types of transactions that qualify, such as a stock sale, an asset sale or a merger. These rules protect the liquidity of the majority by preventing a holdout situation that could ruin a deal.
Sale Mandate
Transaction speed increases when the path to completion is cleared of potential legal obstacles. For the founder, the cost of these provisions is the potential loss of a seat or ownership against their personal will if the investors decide to exit. The hours spent negotiating these terms during the initial funding round reflect the weight of this future obligation.
This contractual power shifts the ultimate fate of the company into the hands of the largest shareholders.
