The tag along clause (right of accession)

The tag along clause, also known as the right of accession, plays a significant role in investment agreements, particularly in terms of protecting the interests of minority shareholders. It is a legal instrument that ensures equality in situations where one of the shareholders, often the dominant one, decides to sell their shares.

What exactly is the tag along clause?

The tag along clause is based on the provisions concerning contracts for the benefit of a third party, as specified in Article 391 of the Civil Code. In essence, it obliges a shareholder who is selling their shares to enable other shareholders (the entitled ones) to also sell their shares on the same terms offered to the original selling shareholder.

The party ensuring performance by the third party is the seller (the entitled shareholder), who has the right to demand the inclusion in the sale, while the third party is the purchaser of the share rights. Consequently, in the event of selling shares to a third party (the purchaser of the shares), the selling shareholder undertakes to the entitled shareholder that the third party will also acquire shares from them at a price per share not lower than that offered to the selling shareholder. The obligation to make such proposals lies with the selling shareholder.

How to properly structure the tag along clause?

It is advisable to include the tag along clause in the article of association already at the stage of drafting. This will ensure transparency and certainty to shareholders regarding the rules of any future sale of shares. In such a situation, the application of the clause in the investment agreement must be in line with the provisions of the article of association.

When drafting the tag along clause, it is essential to consider significant rights and obligations that facilitate the exercise of the right arising from it. This includes, among other things:

• The obligation of the selling shareholder to disclose the possibility of other shareholders joining the transaction in accordance with the tag along clause.
• Ensuring that the selling shareholder allows other interested shareholders to sell their shares to a third party who offered to purchase the shares to the original selling shareholder.
• Stipulating that the conditions for the purchase of shares by entitled shareholders will not be worse than those proposed to the original selling shareholder.

In the investment agreement, it is crucial not to forget to specify the terms that will bind the shareholders exercising the right of accession and the third party acquiring the shares.

How to secure the performance of the obligation arising from the tag along clause?

The tag along clause represents an obligation that the parties to the investment agreement can secure by introducing a contractual penalty. Additionally, including this clause in the article of association along with a contractual provision can strengthen its effectiveness by specifying sanctions for its violation, such as subjecting the shares sold in breach of the tag along clause to compulsory or automatic redemption.

In conclusion, the tag along clause can prove to be a crucial element in an investment agreement, ensuring the protection of minority shareholders’ interests in the event of a sale of shares by a dominant shareholder. Its effective application requires precise drafting and consideration of significant rights and obligations of the parties involved.