Tag-along Option – Co-sale rights

The tag-along option, also known as the right of co-sale, represents a legal mechanism that enables minority company members to join the majority members in case the majority member transfers their share to a third party. This allows minority members to sell their shares under the same terms. This clause is significant as it provides protection for minority members from potential depreciation of their ownership stake and ensures equal opportunities for exiting the company under the same financial conditions as the majority member.

This option allows minority shareholders, in cases where the majority member finds a buyer for their share, to demand that their shares also be included in the sale. This protects minority members from the risk that the new majority owner might jeopardize their interests within the company. By ensuring fair treatment for all members, particularly those holding this option, it provides equal access to the terms of sale negotiated by the majority owner with the third-party buyer. This option is immensely important in startup companies or limited liability companies with multiple members holding different shares, as it ensures stability and predictability in the relationships among members.

It can be said that the tag-along option is, in a sense, opposed to the Drag-along option, as they regulate similar rights but from completely different perspectives, protecting the interests of different parties. As already noted, the tag-along option protects the rights of minority shareholders, whereas the Drag-along option enables the majority shareholder to “force” the minority to sell their shares together under the same conditions.

Although the tag-along option is often not explicitly regulated by law, it can be contractually agreed upon through:

  • The company’s founding act or Memorandum of Association;
  • A shareholders’ agreement, which defines in detail the terms and the procedure for joining the sale.

Since the Serbian Companies Act allows freedom of contract among members, provided the agreed provisions are not contrary to mandatory regulations, it can be concluded that such a clause is permissible. Therefore, in accordance with Article 20 of the Serbian Companies Act, members of a company can include a tag-along clause, thereby predefining rights and obligations in the event of a share transfer.

Procedure for Exercising the Tag-along Right and Obligations of Members

The procedure for exercising the tag-along option may proceed as follows:

  • Notification by the Majority Member – The majority member intending to sell their share notifies the other members of their intent, specifying the terms of sale and the identity of the buyer;
  • Response Deadline – Minority members have a specified timeframe to decide whether to exercise their right to join the sale and sell their shares under the same terms;
  • Conclusion of the Agreement – If the minority members decide to exercise the option, the agreement is concluded with the third party under identical terms as those agreed by the majority member.

Tag-along clause 

A tag-along clause may include additional protective mechanisms, such as:

  • Minimum company valuation as a condition for activating the option;
  • Appropriate deadlines for decision-making and concluding agreements;
  • Contractual penalties for failing to honor the co-sale option or for the refusal of a minority member to conclude the agreement.

Advantages and Disadvantages of the Tag-along Option

Advantages:

  • Protection of Minority Members – Prevents minority owners from remaining in the company with a new majority owner who might harm their interests;
  • Equality of Terms – Ensures equal sales conditions for all members of the company;
  • Avoidance of Legal Uncertainty.

Disadvantages:                                                                     

  • Complication of the Share Transfer Process – The majority member must secure the consent and participation of the minority members, which may slow down the sale;
  • The Risk and Disadvantage for Investors – New investors may perceive this clause as burdensome, as it prevents them from purchasing only the majority share without including minority shares, potentially requiring them to consider acquiring a larger share or the entire company.

The tag-along option, like the Drag-along option, originates from the Anglo-Saxon legal system, primarily the United Kingdom and the United States. These clauses have become widely accepted in venture capital agreements and investment contracts, especially during the development of startup ecosystems. Their purpose is to provide exit strategies for investors and ensure equal treatment for all company members.

The tag-along option is an important contractual mechanism that ensures a fairer approach to protecting the rights of minority members and reduces the risks of unfavorable changes in the company’s ownership structure. Its precise contractual definition contributes to business stability, increased trust among members, and even makes the company more attractive to investors. Despite the complexity of its implementation, this option balances the interests of majority and minority members, contributing to the predictability of business decisions.

In addition to tag-along and drag-along rights, the Call and the Put option are equally as important for regulating relations among members.

 

This text is for informational purposes only and does not constitute legal advice in accordance with the terms of use of this web presentation.