The importance of a water-tight shareholders’ agreement that is in line with the company’s memorandum of incorporation and the provisions of the Companies Act, No. 71 of 2008 (“Companies Act”) cannot be emphasized enough. A shareholders’ agreement that is not drafted in line with its own memorandum of incorporation and the Companies Act is void to the extent of the inconsistency. This often results in shareholder agreements being ineffective and not properly catering for shareholders’ right, privileges and obligations.
There are many salient clauses contained in a shareholders’ agreement worthy of discussion but for the purposes of this article, the ‘Come-Along’ clause and the ‘Tag-Along’ clause are dealt with below.
Tag-Along rights are used to protect minority shareholders. If a majority shareholder(s) decides to sell either their entire shareholding in the company or a percentage thereof to a third party, the tag-along rights will enable the minority shareholder(s) to “tag along” with majority shareholder(s) and sell their shares for the same price and on the same terms and conditions as the majority shareholder(s).
Tag-Along rights are prevalent in shareholders’ agreements for startup companies and other private companies with considerable upside potential. The tag-along rights provide the minority shareholder with the ability to capitalize on a deal that the larger, majority shareholder with considerably more bargaining power, can secure.
Come-Along (or Drag-Along) rights are rights that afford the majority shareholder(s) of a company to require minority shareholders(s) to sell their shares. In essence, if the majority shareholder(s) agree to sell their shares to a prospective buyer, the majority shareholder(s) can “drag along” the minority shareholder(s) to sell their shares to such prospective buyer. The minority shareholders, however, take solace in the fact that they will not be disadvantaged during the drag sale to the extent that the majority shareholders must ensure that they are entitled to sell their shares on the terms, conditions and price as those sold by the majority shareholder.
During the sale of the company, the purchasers are often looking to obtain 100% control of the company. In the absence of a Come-Along right, the minority shareholders may object to selling their shareholding which might ultimately torpedo the sale of the company. The purpose of the Come-Along rights is that the majority shareholders will have effectively already negotiated with the minority shareholders that the former has the right to sell the company, regardless of the terms, conditions and price agreed with the purchaser.