Drag-Along Right

A drag-along right (sometimes called a "bring-along" or "squeeze-out" right) allows a defined majority of shareholders who receive and accept a bona fide offer for the entire issued share capital of the company to force the remaining minority shareholders to sell their shares to the same purchaser on identical terms. The right facilitates clean 100% exits to trade buyers and private-equity acquirers, who almost invariably require full ownership and will not buy a minority stake alongside a resistant holdout.

South African law does not confer a statutory drag-along right. It is a pure creature of contract created in the Memorandum of Incorporation under Section 15(7) of the Companies Act 71 of 2008 or in the shareholders agreement. Because a drag compels a minority to dispose of property on terms they did not negotiate, it must be carefully drafted to avoid falling foul of the oppression remedy in Section 163, under which a court may set aside any act that is "oppressive, unfairly prejudicial, or unfairly disregards" minority interests. Best-practice drafting includes a minimum trigger threshold (typically 75% of shareholders by holding); a requirement that the offer be bona fide and arm's-length, with cash or marketable-securities consideration; identical terms for all shareholders (no side payments to the majority); an independent fairness opinion for significant transactions; and carve-outs preserving minority anti-dilution and liquidation preferences.

Drag-along rights are usually paired with tag-along rights (their protective mirror) and are triggered simultaneously. In venture-capital transactions the drag typically sits with the founders plus a majority of preferred investors. In South African trade-sale practice, a well-drafted drag paired with a tag and a robust pre-emption waiver cascade is the standard exit architecture for closely held companies.