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E-library Corporate Law Drag-along right (French corporate law)

Drag-along right (French corporate law)

21 May 2012

A drag-along right is the right for certain shareholders willing to sell their stake to force all other security holders to join the deal and therefore sell their own shares and securities. A drag-along right generally protects majority shareholders from minority shareholders who, by refusing to sell their own stake, may obstruct a deal.

A drag-along right is generally required by all investment funds in all private equity and venture capital transactions, as it enables them to obtain the liquidity of their investment.

Drag-along rights should be drafted and negotiated with caution, as they may have unexpected and adverse consequences on minority shareholders. Minority shareholders should in particular make sure that a drag-along right does not allow majority shareholders to force them to sell to a purchaser who is related to the majority shareholders and therefore at a risk of selling at a prcie below the fair market value.

A drag-along right should be distinguished from a liquidity right. The reverse of a drag-along right is a tag-along right.

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