A come-along clause, also known as a drag-along clause, is a common provision included in shareholder agreements, particularly in the agreements of growing companies seeking venture capital. While they have advantages and disadvantages, these clauses primarily benefit majority shareholders at the expense of minority shareholders.
Definition
A come-along clause gives certain shareholders, usually majority shareholders, the right to force other shareholders to sell their shares when those certain shareholders decide to sell theirs. For this reason, the clause is also called a drag-along clause, because when the specified shareholder decides to sell, he can drag along all of the others into the sale.
Requirements
A minority shareholder has little recourse. Essentially, the dragging shareholder must only ensure that the other shareholder's interests are purchased at the same price and under the same terms and conditions as the dragging shareholder's.
Purposes
Come-along clauses are inserted in shareholder's agreements in two situations. The first is in the shareholder's agreement of a company which will be seeking venture capital. In this case, the clause assures the venture capitalist that he will have an easily executable exit strategy. These clauses are also used in situations where it is unlikely that an investor would want to purchase anything less than 100 percent of the company. Here, the clause helps make the company marketable.
Problems
Often, holding up a potential sale is the only power a minority shareholder possesses to have any say in the operation of the company. A come-along clause basically gives the majority shareholder the right to negotiate a sale on terms acceptable to himself, leaving other shareholders with no voice at all.