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If you’re thinking about setting up a company or already managing a business with co-founders or investors, you might have come across terms like “tag-along” and “drag-along” rights. These provisions, often called “drag and tag rights,” can have a huge impact on the dynamics between shareholders, your ability to raise capital, and the way your business handles the sale of shares.
Understanding tag-along and drag-along rights isn’t just legal technicality – these rights can safeguard your interests, provide leverage in negotiations, and avoid messy disputes down the track. If you’re a co-founder, major investor, or even just thinking of joining as a shareholder, knowing how these rights work can help you make smarter decisions as your business grows.
Let’s break down what tag-along and drag-along rights are, why they matter for Australian businesses, and how you can make sure your company is set up for success – without unintended surprises.
What Are Tag-Along and Drag-Along Rights?
Tag-along and drag-along rights are contractual arrangements you’ll often find in shareholders agreements or investment agreements. They govern what happens when some shareholders want to sell their shares to an outsider.
What Are Tag-Along Rights?
Tag-along rights (also called “co-sale rights”) are designed to protect minority shareholders. Simply put, if a major shareholder (such as a founder or investor) finds a buyer for their shares, tag-along rights allow minority shareholders to “tag along” and sell their shares to the same buyer, on the same terms.
For example, if a large investor negotiates a sale to someone outside the company, as a minority shareholder, you can require that the buyer also makes the same offer to you for your shares. This helps you avoid being left behind with a new majority owner you didn’t choose.
What Are Drag-Along Rights?
Drag-along rights (sometimes called “drag rights”) work in favour of majority shareholders. If most shareholders agree to sell the company to a third party, drag-along rights allow them to “drag” minority shareholders into the deal – forcing them to sell their shares on the same terms so the buyer can purchase the whole company.
These rights can be crucial if a potential buyer only wants to purchase the entire company, not just a majority stake. It prevents any small shareholder from blocking the sale.
What’s The Difference Between Drag and Tag?
While both are about share sales, tag-along rights protect minority shareholders (by giving them a chance to exit too), and drag-along rights protect major shareholders and buyers (by making sure nobody can hold up a whole-company sale).
Together, these provisions – sometimes generally called “tag along drag along rights” or “drag and tag” – help smooth out the process when ownership changes hands.
Why Are Tag-Along and Drag-Along Rights Important for Australian Businesses?
Whether you’re launching a startup or scaling an established company, understanding tag-along and drag-along rights is about more than just legal compliance – it’s key to protecting your investment and making your company attractive to investors.
- Investor Appeal: Clear tag and drag rights reassure new investors that they can exit with everyone else (so they’re not left behind or held hostage in a small minority when the company changes hands).
- Dispute Prevention: These rights set expectations from day one, helping avoid stalled deals and disputes between founders, investors, and outside buyers (which are especially common without these protections).
- Streamlined Exits: Drag-along rights make it easier to sell the whole company, as the buyer can be confident of acquiring 100% ownership without rounding up every last shareholder individually.
- Fairness for Minority Shareholders: Tag-along rights give smaller shareholders some negotiating power and more certainty if big changes are afoot.
In the Australian context, these rights are not automatic – you need to put them in your shareholders agreement or company constitution. Otherwise, you risk facing legal grey areas in the event of a sale.
When Should You Put Tag-Along and Drag-Along Rights in Place?
The best time to include tag-along and drag-along rights is before your business faces potential sales, disputes, or new rounds of investment. In practice, these rights are often negotiated:
- When setting up a company with co-founders – ideally in your initial shareholders agreement.
- When bringing in early investors or family/friends – so everyone is clear on their rights if the company is sold later.
- Prior to a capital raise – as new investors will often request these rights for certainty and protection.
- During succession planning for family businesses – where you want to avoid future deadlocks if some family members want to exit.
It’s much more difficult – and sometimes impossible – to add or change these rights after a dispute has started, or when a party is already actively looking to sell their shares. Having these clauses from day one is the smarter, low-risk approach.
How Do Tag-Along and Drag-Along Rights Work in Practice?
Let’s look at a simplified example for clarity:
- Scenario: You and your co-founder set up a company and soon bring in an investor who takes a 30% stake. Your shareholders agreement contains both tag-along and drag-along rights.
- Years later: A large company approaches the investor and offers to buy their shares (30%) at a premium.
- Tag-along rights: As founders with minority stakes, you can require the buyer to purchase your shares on the same terms, so you’re not left with a new investor you don’t know.
- Drag-along rights: If you (as majority holders) want to sell 70% but the buyer demands 100% of the company, you can use drag rights to force the investor to also sell their stake, ensuring a smooth sale.
In both cases, these provisions mean everyone receives the same offer and terms, and most importantly, no one can unfairly block a major transaction.
What Should Tag-Along and Drag-Along Clauses Cover?
Not all tag-along and drag-along provisions are the same. A well-drafted clause should clearly outline:
- Who can exercise the rights: e.g., majority vs. minority threshold, or a defined group of shareholders.
- When the rights are triggered: Are they activated for all sales, or just if a certain % of shares are being sold? Clarifying this avoids disputes over minor transactions.
- Notice requirements: How much notice must be given to shareholders before finalising a deal?
- The terms of sale: Do all affected shareholders get the same deal (price, conditions, warranties)?
- What happens if a shareholder objects: Is there any process for disputes, or are dissenting shareholders compelled to sell?
- Who pays transaction costs: Do selling shareholders cover their own legal fees, or are costs apportioned?
- Regulatory or third-party consents: Are there conditions if sales need approval from regulators or financiers?
Because every business is different, standard clauses from the internet rarely cover the specifics that might matter most in your industry or structure. It’s always wise to have these clauses tailored by a legal expert to your actual situation.
Do I Need a Shareholders Agreement for Tag-Along and Drag-Along Rights?
Absolutely. A shareholders agreement is the most common and effective place to set out tag-along and drag-along rights. While you can also outline them in your company constitution, the shareholders agreement is typically more detailed and flexible.
Here’s why you should consider a tailored shareholders agreement:
- It sets clear ground rules between founders, investors, and any new shareholders.
- Helps avoid “he said, she said” deadlocks around exits and ownership changes.
- Gives confidence to new investors, making capital raising easier.
- Can cover additional areas such as good leaver/bad leaver provisions, dividend policy, and dispute resolution.
Are Tag-Along and Drag-Along Rights Required By Law in Australia?
No, these rights aren’t legally required by Australian law – they’re matters of contract, meaning they exist only if you choose to put them in your agreements. The Corporations Act 2001 (Cth), which governs Australian companies, doesn’t automatically provide for tag or drag rights.
That said, these provisions are widely expected by experienced investors, so leaving them out can make your business less attractive or even cause deals to fall through.
What Other Legal Considerations Should I Be Aware Of?
- Company Structure: If you’re not already operating as a proprietary limited company (Pty Ltd), you’ll need to structure your business this way to issue shares and have a shareholders agreement.
- Share Classes: Consider whether different classes of shares (with differing voting rights or dividends) could interact with your tag and drag provisions.
- Franchising & Expansion: Planning to franchise? These rights may also play a role if you sell to master franchisees or investors – make sure your franchise agreements are aligned with your shareholders agreement.
- Exit & Succession Planning: Tag-along and drag-along rights can form part of a broader exit strategy or family succession plan for your business.
- Regulatory Compliance: If you’re raising funds from investors, you must also ensure compliance with ASIC rules on share offers, disclosure, and capital raising – for detail, see our capital raising guide.
It’s also important to note that these rights need careful drafting to ensure they’re enforceable and clearly understood – vague or homemade clauses can sometimes do more harm than good.
What Legal Documents Do I Need to Put Tag-Along and Drag-Along Rights in Place?
If you want to implement these rights, here are the key legal documents you’ll need:
- Shareholders Agreement: The main document for setting out tag-along and drag-along rights, as well as management, voting, and other key company rules. Get a Shareholders Agreement
- Company Constitution: Some companies (especially at incorporation) choose to also include these rights here for extra certainty.
- Share Subscription Agreement: If you’re issuing new shares to investors, ensure that any tag-along and drag-along terms are referenced in the subscription agreement as well. Learn more about Share Subscription Agreements
- Deed of Accession: To make sure new shareholders (investors, employees with shares, etc.) are bound by existing shareholder agreements with tag and drag rights.
Not every company will need all of these documents, but for any business with more than one shareholder, a shareholders agreement with clear tag-along and drag-along provisions is strongly recommended.
What Are Common Mistakes When Setting Up Tag-Along and Drag-Along Rights?
Over the years, we’ve seen a few common pitfalls, which you should try to avoid:
- Leaving it until too late: The longer you wait, the harder it is to negotiate fair terms – especially if a sale or dispute is already in play.
- Using free templates: Standard template clauses may be poorly drafted, ambiguous, or completely unsuitable for your ownership structure.
- Unclear triggers: Not spelling out exactly when these rights apply (e.g., type of sale, share percentage, seller group) can lead to disagreement and even litigation.
- No deed of accession: Forgetting to require new shareholders to sign on to your agreement means they may not be bound by tag or drag rights.
- Overly complicated or unfair clauses: Making rights only apply for certain shareholders or under unrealistic conditions can cause mistrust in your founding team or investor group.
It pays to have a lawyer review or draft your shareholders agreement to avoid these mistakes, tailoring the rights to your actual structure, business goals, and risk appetite.
Can I Change Tag-Along or Drag-Along Rights Later?
In most cases, you can amend your shareholders agreement or company constitution, provided the required majority of shareholders agree (often 75%). However, this can become contentious if some shareholders oppose the removal or amendment of their rights – especially if it affects their ability to exit or maintain control.
Early, up-front agreement is much easier than trying to renegotiate when circumstances have changed or relationships have soured.
Key Takeaways
- Tag-along and drag-along rights are vital provisions for any Australian business with more than one shareholder, balancing the interests of both minority and majority owners when it comes to the sale of shares.
- These rights are not automatic – they must be included in your shareholders agreement or company constitution, ideally tailored to your company from day one.
- Tag-along rights protect minorities by letting them exit if major shareholders do, while drag-along rights let majority owners ensure a full sale can go ahead.
- Clear, well-drafted clauses reduce disputes, protect investments, and make your business more attractive to outside investors and buyers.
- It’s wise to review and update your company records, including putting in place proper deeds of accession when new shareholders join, so everyone is bound by the same agreement.
- Getting specialist legal advice ensures your tag-along and drag-along provisions are fit for purpose, enforceable, and in line with your business goals.
If you’d like a consultation on setting up tag-along and drag-along rights for your company or reviewing your shareholders agreement, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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