What is a drag along clause

In today’s blog post for Devesa & Calvo Abogados Alicante and Valencia, I am going to refer to the “drag along” clause, also known as drag along right. This type of clause is often used in our professional practice to protect those clients who wish to have the possibility of closing a good business deal by selling a 100% of their company’s share capital, but that until then are going to share a business project with other partners. Its purpose is to prevent certain partners from blocking a possible company sale to a potential investor/buyer who is interested in acquiring 100% of the company.

This is a conventional right, meaning that it is agreed by the shareholders under the party’s autonomy principle, which applies in Spanish private law and therefore also in Commercial law. That is, if it is not agreed, it is not recognised in any legal provision of the Capital Companies Act or in its concordant legislation.

 

 What does the “drag along” clause consist of?

It consists of an agreement between the shareholders so that when they receive a purchase offer for their shares, they can drag along the rest of the shareholders who make up to a 100% of the company’s share capital (hence its name “drag along right”). The shareholders are obliged to sell by virtue of this right’s exercise as long as the sale is carried out on the same terms as those applied by the person urging the implementation of the drag along (essentially the price, form and payment timing).

 

Can a drag along clause be registered in the Commercial Register?

The answer is yes. In addition to being stipulated within the framework of a shareholder’s agreement or an extra-statutory agreement, article 188.3 of the Commercial Register Regulations allows forcing the  shareholders to transfer their shares to third parties as long as the “circumstances are clearly and precisely stated in the articles of association“.

The advantage of including the clause in the articles of association and having it duly registered in the Commercial Register, is that it will be enforceable against third parties, including future company’s shareholders. If, on the other hand, it is not  included it in the articles of association and registered, and it is only included in an agreement between partners, it will be exclusively binding and obligatory for the signatories of the document, but it will not be enforceable against third parties.

 

David Devesa Rodríguez.

Founding partner – CEO of Devesa & Calvo Abogados.

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