PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.
It makes sense to have a partnership agreement (or a shareholders’ agreement if the business is a company) in place from day one. This will normally have a ‘drag-along’ clause, which requires the other shareholder(s) to sell their shares to a third party wishing to acquire the whole of the business when a majority of the shareholders agree.
A recent case has confirmed that where the clause is sufficiently precise, a drag-along clause is enforceable.
It involved the owner-manager of a company who wished to acquire another company. He did not have sufficient funds to do so, so sought assistance from a private investor. They formed a new holding company for the purpose of buying out the target and the target was duly purchased. The two men created a shareholders’ agreement, which provided that in certain circumstances the investor could require the owner-manager to acquire his shares and, if he failed to do so, the investor could sell them to a third party.
When these circumstances occurred, the investor sought to invoke the disposal of his shares under the drag-along clause. The owner-manager attempted to resist the transfer of the shares. However, because the drag-along clause was very tightly worded, the court accepted that the clause could be enforced.