Drag Along & Tag Along Clauses In Shareholders Agreements (2026 Updated)

If you’re building a company with other shareholders, it’s easy to focus on the exciting stuff (product, customers, growth) and put the “legal fine print” off until later.

But when a shareholder wants to sell, an investor comes knocking, or someone’s ready to exit, the fine print suddenly becomes the main event.

That’s where drag along and tag along clauses come in. These clauses are common in New Zealand Shareholders Agreement documents because they help prevent deadlocks, protect minority shareholders, and give buyers confidence they can actually acquire the business they’re negotiating for.

This article is updated to reflect current NZ market practice and the way modern startups and SMEs structure exits and investment rounds today. Let’s break down what these clauses mean, how they work, and how to negotiate them so you’re protected from day one.

What Are Drag Along And Tag Along Clauses (In Plain English)?

Drag along and tag along clauses are “exit mechanics” that sit inside your shareholders agreement. They kick in when one shareholder (or a group of shareholders) wants to sell their shares to a third party.

They’re designed to solve a common problem: buyers and investors usually want certainty about who they’re dealing with and whether they can acquire a meaningful stake (often 100%) if they make an offer.

Drag Along Clause: The Majority Can “Drag” The Minority Into A Sale

A drag along clause gives a majority shareholder (or majority group) the right to require minority shareholders to sell their shares on the same terms, if the majority accepts an offer.

In other words, if the company gets a good offer and the majority wants to sell, the minority can’t block the deal just by refusing to sign.

This is mainly about making exits possible and making your company easier to sell.

Tag Along Clause: The Minority Can “Tag” Along With The Majority

A tag along clause protects minority shareholders when the majority sells.

If the majority shareholder is selling their shares, the tag along clause usually allows minority shareholders to join the sale and sell their shares too (on the same price and terms).

This prevents minority shareholders being left behind in a company they didn’t choose to stay in, potentially with a new controlling shareholder they don’t trust.

Why These Clauses Matter In Real Life

Here’s the simplest way to think about it:

• Drag along protects the deal (and the buyer).
• Tag along protects the minority shareholder.

Good drafting balances both, so no one is trapped and no one can hold the company hostage.

When Do Drag Along And Tag Along Clauses Usually Apply?

These clauses don’t apply to every share transfer. They usually apply to specific events defined in the agreement.

Common triggers include:

• A third-party sale offer for some or all shares (for example, a strategic buyer wants to acquire the company).
• A change of control transaction (a buyer is seeking more than 50% of voting rights, or effectively control of the company).
• An investor-led exit where a required majority of shareholders agrees to sell.

It’s also common for the shareholders agreement to say the sale must be a “bona fide” (genuine) third-party offer, meaning you can’t manufacture a deal just to force someone out.

How Drag Along Works Step-By-Step

While every agreement is different, drag along clauses usually work something like this:

1. Offer received: A buyer makes an offer to purchase shares (often aiming for 100%).
2. Majority approval: A specified threshold of shareholders approves the sale (for example, holders of 75% of shares).
3. Drag notice issued: The majority gives formal notice to the minority that they must participate.
4. Same terms apply: Minority shareholders must sell on the same price, timing, and key terms.
5. Completion: Everyone signs the required sale documents and the deal completes.

The “majority approval” threshold is one of the most negotiated parts, because it determines how easily a drag can be used.

How Tag Along Works Step-By-Step

Tag along clauses often work like this:

1. Majority intends to sell: A majority shareholder agrees to sell their shares to a third party.
2. Tag notice given: Minority shareholders are notified and given the option to participate.
3. Minority elects to tag: They choose whether to sell some or all of their shares under the clause.
4. Buyer buys both: The buyer purchases the majority’s shares and the tagged shares, usually on the same terms.

Tag along clauses are especially important where there’s a risk the majority shareholder might “cash out” and leave others behind with a new controller.

Why Buyers And Investors Care (And Why You Should Too)

If you’re trying to raise capital or position your business for a future exit, buyers and investors often expect drag and tag provisions as part of your corporate governance.

From a buyer’s perspective, the key concern is simple: if we make an offer, can we actually acquire the business?

If minority shareholders can refuse to sell, a buyer might end up with only part of the company. That can create problems like:

• ongoing minority shareholder rights and disputes
• difficulty integrating the business
• constraints around governance and decision-making
• risk that the buyer pays a premium but can’t fully control outcomes

This is why drag along rights are often considered “deal enabling”. They reduce transaction risk and can improve the company’s attractiveness in due diligence.

At the same time, from a minority shareholder’s perspective, tag along rights help ensure you’re not treated unfairly in an exit process. If the majority gets a great offer, you generally want the ability to participate in that same upside.

How These Clauses Fit Into The Bigger “Company Paperwork” Picture

Drag and tag clauses don’t exist in isolation. They usually need to align with:

• your Company Constitution (if you have one)
• any share transfer restrictions or pre-emptive rights
• director and shareholder decision thresholds
• the practical signing process for a sale (including warranties and indemnities)

When these documents clash, it’s not just inconvenient - it can delay a deal or weaken your negotiating position.

Key Terms To Negotiate In Drag Along And Tag Along Clauses

These clauses can be short, but the details matter. If you’re signing a shareholders agreement (or updating an old one), these are the terms you’ll want to understand before you’re locked in.

1) The Threshold: Who Can Trigger A Drag?

The agreement should specify what percentage of shareholders (or shares) is required to trigger drag along rights.

Common approaches include:

• Simple majority (more than 50%)
• Special majority (often 75%)
• Investor consent model (for example, a particular class of shares must approve)

As a founder or minority shareholder, the threshold affects how much control you retain over a major exit decision.

2) What Counts As A “Sale” Or “Exit”?

Good drafting defines the trigger event clearly. For example:

• sale of shares resulting in a change of control
• sale of all or substantially all company assets (sometimes included)
• group company restructure transactions (sometimes excluded if internal)

If you don’t define this properly, you can end up with arguments over whether drag/tag applies to an asset sale, a merger, or a partial sale.

3) Same Terms Requirement (Price And Conditions)

A core protection in both drag and tag is that shareholders are treated consistently.

Typically, this means:

• the same price per share (or same valuation approach)
• the same completion date and payment structure
• the same key deal terms (restraints, warranties, etc.)

However, this gets tricky if shareholders hold different classes of shares or have different rights. It’s important the agreement deals with how preference shares, ordinary shares, or employee shares are treated.

4) Warranty And Indemnity Exposure (Who Is On The Hook?)

In a typical share sale, buyers ask sellers to give warranties (promises about the business) and sometimes indemnities (a commitment to cover certain losses).

If you’re a minority shareholder being dragged into a sale, you’ll usually want limits so you’re not taking on the same commercial risk as someone who ran the business day-to-day.

Common protections include:

• several (not joint) liability so each seller is responsible only for their share of risk
• caps on warranty liability, often tied to sale proceeds received
• time limits on claims
• knowledge qualifiers (you only warrant what you actually know)

This is one of those areas where a generic template can cause real damage, because the risk allocation can be wildly inappropriate for your role in the business.

5) Notice Periods And Process Requirements

Drag and tag rights only work smoothly if the process is clear. Look for provisions around:

• how notice must be given (email, registered post, etc.)
• minimum notice periods
• what information must be included (buyer details, price, conditions)
• signing timelines and power of attorney mechanics (sometimes used where a shareholder is unresponsive)

If these mechanics aren’t clear, a shareholder can slow down or disrupt an otherwise good deal.

6) Interaction With Other Share Transfer Rules

Many companies also include rights like:

• rights of first refusal / pre-emptive rights
• board consent requirements for transfers
• restrictions during vesting periods

Your drag/tag clauses need to be drafted so they work alongside these restrictions rather than being blocked by them.

Common Mistakes We See With Drag/Tag Clauses (And How To Avoid Them)

Drag along and tag along clauses are meant to reduce conflict, but poorly drafted clauses can create the very disputes they’re supposed to prevent.

Using A Template That Doesn’t Match Your Ownership Reality

For example, a “standard” drag threshold might make sense for a company with 3 equal founders, but it can be unfair (or unworkable) if you have:

• multiple investor classes
• an employee share scheme
• a mix of active and passive shareholders

When the clause doesn’t match the cap table, people get surprised later - and that’s when relationships break down.

Not Thinking About Shareholder Duties And Governance

Shareholders agreements sit alongside broader company governance under the Companies Act 1993. Directors still need to act in the company’s best interests, and the way decisions are made should be consistent and defensible.

If the company is making major decisions (like approving a sale process), it’s also common to document those decisions properly using a Directors Resolution, especially where timing matters or stakeholders later want clarity about how a decision was made.

Forgetting The Constitution (Or Letting It Contradict The Shareholders Agreement)

If your constitution has transfer restrictions that contradict drag/tag rights, you can end up in a messy legal and practical position during an exit.

This is why it’s important to treat your constitution and shareholders agreement as a matched set, rather than separate “admin documents”.

Ignoring The Human Side Of Exits

Exits can be emotional, especially for founder-led SMEs where shareholders are also friends, family, or long-time collaborators.

Clear drag and tag provisions don’t just protect value - they reduce stress, uncertainty, and the risk of a relationship breakdown derailing the business.

If you’re also documenting how shareholders join or leave, it can help to address related issues (like restraints, confidentiality, and disputes) in the same agreement, so you’re not scrambling later.

Key Takeaways

• Drag along clauses help the majority complete a sale by requiring minority shareholders to sell on the same terms, which can make your company significantly easier to sell.
• Tag along clauses protect minority shareholders by giving them the right to join a sale and receive the same offer terms when the majority sells.
• Well-drafted drag/tag clauses should clearly set out the trigger events, approval thresholds, notice process, and how price and terms are applied.
• Warranty and indemnity risk is a major issue for minority shareholders in dragged sales, so liability should be allocated fairly and practically.
• Your shareholders agreement should align with your constitution and broader governance documents to avoid contradictions that can delay deals.
• Because these clauses affect control and exit rights, it’s worth getting them tailored to your cap table and business goals rather than relying on generic templates.

If you’d like help drafting or updating a Shareholders Agreement (including drag along and tag along clauses that actually fit your company), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.