A legal term, the idea of tag along rights applies to corporate shareholders. Tag along rights are the rights given to minority shareholders that would allow the minority shareholders the benefits of the majority shareholder. An application of tag along rights would be seen when a majority shareholder wanted to sell their rights in a particular company. The minority shareholder would be able to sell their shares with the same price and conditions the majority shareholder employed. Tag along rights protect the minority shareholder by giving them the same options as the majority shareholder. This contractual obligation is sometimes referred to as the co-sale right.
Tag along rights protect the minority shareholder in the event that a hostile take-over occurs. Particularly seen in a venture capital deal, the majority shareholder is contractually obligated to include minority shareholders in the negotiations of a sale. The tag along allows equity holders to force another equity holder to include them in a potential sale.
A tag along sale benefits the minority shareholder because the majority shareholder may have access to potential buyers, is better able to negotiate sale terms and can arrange a deal that is attractive to both buyer and seller. One of the potential downsides to the exercise of tag along rights is the large number of shares that the buyer may now own. This can be unsettling to company management and owners of the new company who may be suddenly faced with a large shareholder.
By capitalizing on a deal that the major shareholders broker, the minority shareholder has the opportunity to benefit from a sale or investment that they may not have had access to on their own. Knowing the rights and benefits that shareholders may have in a potential sale will enable the shareholder to maximize their investment.
