The 'tag along' clauses (as well as the 'drag along' clauses discussed below) are among those which, to use Italian legal terminology, we can call 'co-sale' clauses.
The 'tag along' is also referred to as a 'queuing clause' and serves to give guarantees to minority shareholders in order to avoid lucrative transactions that are detrimental to the shareholders.
Tag along clauses are used in shareholders agreements and equity joint venture agreements to provide for the right (tag along) of one of the shareholders (usually the minority shareholder) to sell its shares when the other shareholder (the majority shareholder) decides to transfer its shares to a third party.
This right is generally recognised as a standard clause in any investment contract with the aim of protecting the interests of minority shareholders. The minority shareholder is thus protected in the event that the majority shareholder decides to sell its shares, allowing the minority shareholder to negotiate more favourable economic conditions. Moreover, should the new buyer prove to be unpalatable to the minority partner, the latter, while not being able to avoid the transfer of the majority partner's shares, has the opportunity to sell its own and avoid being confronted with any unfavourable speculative exits.
In practice, if the minority shareholder exercises this right, the majority shareholder is obliged to ensure the sale of the minority shares on the same terms as agreed with the purchaser.
For example, if company XX holds 70% of "Company YY" and ZZ holds only the remaining 30%, ZZ (the minority shareholder) may choose to sell its share at the same price agreed upon by XX.
What is the difference between "tag along" and "drag along"?
With the "drag along" clause, the majority shareholder has the right to drag the minority shareholder into the sale. Drag along therefore entails an obligation for the minority shareholders to sell their shares. In return for this obligation, the minority partners have the right to sell on the same terms as the majority partner.
Both co-sale clauses impose obligatory choices on some partners on the basis of decisions made by other partners. The difference between 'tag along' and 'drag along' is that the former grants minority shareholders a right to sell whereas the latter imposes an obligation on them.
In any case, the minority partner is always granted the sale on the same terms as the majority partner. Between the two clauses, however, the tag along protects the freedom of the minority shareholders who can choose whether and when to sell their shares in the company, without any obligation.
Tag along and crowdfunding
Despite the widespread use of co-sale agreements in corporate practice, they do not enjoy a statutory definition or general regulation in our legal system.
The only ad hoc regulatory reference (relating exclusively to 'tag along') is Article 24 of Consob Regulation No. 18592 of 26 June 2013 regulating the raising of risk capital by innovative start-ups through online portals (of Equity Crowdfunding).
This article guarantees an investor protection mechanism through which it is provided that, for the purposes of admission of the offer on the portal, the latter will be obliged to verify that the issuer's bylaws provide for a 'tag along' right, indicating the relative terms of exercise upon the occurrence of the 'change of control' condition.
This right, which takes the form of an investor's exit right, can only be exercised by retail investors, and is intended to protect their interest in maintaining the capital composition of the issuer in which they have invested, both with respect to the continuation of the same risk profile that the investor assumed at the time of the investment, and with respect to the technological/innovative peculiarities that characterise the issuers in question, with respect to which the exit of even a single shareholder could be decisive.
In the European crowdfunding regulation concerning the discipline of venture capital raising by innovative start-ups through equity crowdfunding, it is provided that the investment portal must mandatorily verify that the bylaws of the company requesting admission provide for a 'tag along' clause.