The Tag Along Right, as other clauses and agreements we have previously reviewed in this blog, has the purpose to regulate the withdraw of the partners from the Company. This right is established particularly with the aim to grant protection to minority partners and/or shareholders.
This agreement grants the signatory shareholders the right of option to join the sale of shares between another (majority) shareholder and a third party. The protection given to the minority shareholder is in terms of the fact that these often join the Company with an special regard of the people that are part of it, thus, the withdraw of certain individuals may signify a detriment on their interests.
A relevant feature of the Tag Along Right lies in the fact that the selling price as well as other conditions of the deal, that the majority shareholder settled with a third party, remain the same for every shareholder who approved the agreement and exercise their right of option to join such deal.
Therefore, the third party involved may not be interested in the forced purchase of a larger amount of shares or, it can be agreed upon the tag Along Right shareholders that the purchase by the third party to be for the same number of shares that was agreed in the initial deal with the majority shareholder, but, split pro rata between all the shareholders who exercise their right.
To ensure the chance to exercise the right of option, it is involved in this agreement the obligation of the selling shareholder to inform to all of the beneficiary parties about the purchase-sale of shares including the conditions of the transaction, in advance and within the established term.
Legally, this right is a unilateral preliminary agreement in nature, because its beneficiaries are under the obligation only in the case of exercising their right to option, which in turn will only depend of his/her will. It is preliminary since the final contract will be the purchase-sale of shares itself.
About the safeguards that this Right grants to the signatory shareholder we can quote Jorge Ugarte Vial as he references the requirements that the initial deal (majority shareholder – third party) has to embrace:
“In conclusion, the grantor is free to sell his shares to whomever he wishes, at the prices and under the conditions considered appropriate, unless the purchase-sale implies an illicit simulation or fraud against the beneficiary rights. If that was the case, and if the beneficiary is able to prove that the agreement between the grantor and the third party, involved an illicit simulation or it was entered in fraud against their legitimate rights, in a way that restrains or hinders unfairly the exercise of the right of option according to what was previously established, we then consider that the beneficiary could enforce legal action to prevent said purchase-sale with the third party”[1]
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[1] Pactos Sobre Transferencia de Acciones, Jorge Ugarte Vial, 2016
Francisco Mulatti, Lawyer.
Photo: Benjamin Child (CC0)