Tag-Along Provision Operating Agreement
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A drag-along right is a provision or clause in an agreement that allows a majority shareholder to compel a minority shareholder to sell a business. The majority owner who goes through saturation must give the minority shareholder the same price, conditions and conditions as any other seller. In many cases, a potential buyer may not be interested in acquiring only part of the business. Even if the buyer can acquire a majority of equity in the business, the buyer may not cling to a minority group that is uncooperative or hostile. Under these conditions, the drag-along rights are intended to facilitate the sale of the business. They allow the majority member to assure a potential buyer that, as soon as an agreement is reached, the buyer will be able to acquire all (not just a portion) of the company`s equity. Minority members are “co-drawn” in the agreement because of their prior commitment to the enterprise agreement. Tag along provisions allow members who hold less of the majority of the company`s equity to participate in a sale simultaneously and at the same price as the majority members. The rights to tag along benefit minority members because they can tag-along if majority members get an agreement with a third-party buyer.
The majority member is not in a position to sell its equity to the company if the sale does not give minority members the right to participate. If an LLC agreement contains a ROFO, the LLC agreement should also not contain ROFR. While there are no legal restrictions on the inclusion of these two provisions, the procedures that must be followed in both cases can be lengthy and ultimately achieve the same objective, so it is impractical to include these two provisions. If the evaluation procedures are ambiguous (or if the agreement remains silent on the matter), the parties must negotiate the assessment of the LLC`s interests at a time when they may have conflicting interests. This can lead to tedious and costly negotiations. In this agreement, Celgene`s shares were withdrawn from the stock exchange. Minority shareholders were required to comply with the terms of the agreement and were not eligible for special considerations. If Celgen`s shares had not been taken off the stock exchange, drag along and tag along rights could have become more of a factor. In some cases, such as this, majority shareholders may negotiate special share rights under an alternative class structure that may not be made available to minority shareholders because of the effects of drag-along rights. Despite any authorized transfer or other provision of the LLC agreement, any transfer – or withdrawal – when the LLC is treated as a partnership for federal tax purposes in the United States, is generally prohibited from treating the LLC as a corporation for U.S. income tax purposes. Tag along rights differ from drag-along rights, although they have the same underlying view.
It is also possible to find tag along rights in share offers as well as in merger and acquisition contracts. Tag-along rights offer minority shareholders the opportunity to sell, but do not impose any obligation. If there are tag along rights, this may have a different impact on the terms of a merger or acquisition than would be discussed with drag along rights. The valuation of transferred LLC`s holdings is a critical element of any repurchase commission. It is important to establish a clear procedure for the valuation of transferred LLC units when the parties enter into the LLC agreement (or sale-for-sale agreement so separately) for the first time, since the interests of the parties are rather coordinated at that time. Often, an LLC`s enterprise agreement or a company`s shareholders` pact contains provisions on what happens when a third party attempts to acquire shares in the company. Well-developed drag-along and tag-along provisions are practical tools for solving practical and administrative problems in the context of exit. As with any business planning tool, the