Drag-along and Tag-Along: An Introduction to the Concepts

By Mohamed Ghazy

In corporate life, a share
holders' agreement is an essential bond between a company's shareholders. It is a contract that sets out the terms and requirements for board and shareholder meetings, shareholder duties, entitlements, and rights to information. The agreement, to the contrary of the company's articles of association, is undisclosed and confidential, which is the primary difference between both documents.

Of course, shares are not usually owned equally, and in most cases there would be a majority shareholder with voting rights attached to the shares, leaving the remaining shares, a minority, to other shareholder(s).

A problem exists, though, when the majority shareholder wants to sell the company while the minority shareholders are not interested in doing so. This fork in the road presents a problem for both sides as the majority shareholder feels stuck in the company while the minority shareholders face the threat of being left behind, because realistically speaking, new buyers don't intend to include the existing shareholder minority in the new endeavor; they simply aim to take 100% of the company they are buying.

The solution for this issue lies within two concepts that have become a staple in mergers, acquisitions, and takeovers nowadays: Drag-along and Tag-along rights.

Who drags whom, exactly? Who does the tagging and who does the dragging?

The majority shareholder does the dragging, while the minority shareholders tag along.

The idea is the following: the majority owning shareholder would absolutely benefit from having an exit plan from the company. They own the most, so when the time comes and they want out, having a way to facilitate that would be ideal. Drag-along offers liquidity and flexibility for such a move.

Of course, the minority shareholders might not view this ordeal the same way, and so here comes the dragging part. The minority shareholders are forced to be dragged into the selling of the company, however, they will be receiving the same price, terms, and conditions that the majority has received from the transaction. In a way, it presents a safeguard for the minority, though it doesn't exempt them from the obligation of being forced into the deal.

But then again, that's the entire idea of the drag-along; to clean up any remnants of the old company, especially leaving shares in the hands of the old minority shareholders, so not only are they unable to hinder any transaction desired by the majority shareholders, they are absolutely extracted from the company.

All for the fair price of being handed the same prices the majority shareholder benefits from the purchase.

Seemingly, aside from being forced out of the company, things don't seem too bad for the minority shareholders. With tag-along rights, it gets better.

In a tag-along, the minority shareholders actually have a say when presented with an approaching buyer for their company. Not only do they get the same prices from the purchase just like the majority in the drag-along, they also get to decide whether they want in on the deal or not.

Even the term "tagging along" sounds less harsh. The tag-along does not enforce any obligation on the minority shareholders to join the deal. It's more of a co-sale.

Now given that the drag-along and tag-along rights are very common with M&A's, how are they regulated in Egypt?

Not at all, apparently.

There are no current regulations in Egypt that address drag-along and tag-along. Even the General Authority for Investment (GAFI) has no history with addressing them. The concept, despite being natural in corporate life, doesn't have any framework in Egypt. Consequently, this leaves any matters related to drag-along and tag-along to be governed by Civil Law until further notice.