Tag-along Right

A tag-along right allows a minority shareholder to join a sale when the majority shareholder or founders sell their shares to a third party. The minority shareholder may sell its own shares to the same buyer at the same price and on the same terms. When control changes hands, the minority is therefore not left alone with an unknown new majority shareholder and shares equally in any control premium.

Types

• Full tag-along: On a change of control, the minority shareholder may sell all its shares.
• Pro rata tag-along: The minority shareholder may sell the same proportion of its shares as the seller. For example, if a founder sells half its shares, the investor may also sell half of its shares.

What the Agreement Should Cover

• The sales triggering the right and exceptions (intra-group transfers, small transfers under an employee stock option plan),
• Notice and exercise periods,
• Equal price and terms; in particular, whether separate payments to the seller such as consultancy fees or non-compete payments count towards the price,
• The scope of the representations and warranties given by the minority shareholder; generally limited to title to its own shares and capacity.

Application under Turkish Law

The tag-along right is not regulated in the Turkish Commercial Code; it is created by the shareholders’ agreement and binds only its parties. If the selling shareholder sells its shares in breach of the right, the sale is generally valid; the minority shareholder can only claim damages or a contractual penalty. The right is therefore supported by a high contractual penalty and transfer restrictions in the articles.

The tag-along right protects the minority; its counterpart, allowing the majority to bring the minority into a sale, is the drag-along right. If other shareholders also have a right of first refusal, whether that right is exercised is decided before the sale.