When forming a new business, it’s essential to have a well-drafted operating agreement. One crucial provision to include in this document is the “tag-along provision.”
A tag-along provision is a clause in an operating agreement that protects minority shareholders or members, ensuring they have the right to sell their interest in the company if a majority owner decides to sell their shares. This ensures that minority members are not left behind if a major sale occurs.
How does it work? Suppose a majority owner receives a purchase offer from a third party who wants to acquire the company. In that case, the tag-along provision kicks in and ensures that the minority owners have the right to participate in the sale. Therefore, if the controlling member decides to sell their shares to the third party, the minority members have the option to sell their shares as well.
This legal provision is especially important for minority members to protect their interests in closely held companies. They have a right to receive a fair share of the profits and distribution, and the tag-along provision ensures that they are not forced to remain as shareholders if they do not wish to.
The tag-along provision can also provide protection during disputes between the controlling and minority members. In cases where the majority owner is seeking to push out minority members, the tag-along provision kicks in to safeguard their interests by allowing them to sell their stake in the event of a sale of the company.
In conclusion, including a tag-along provision in an operating agreement is important. This provision helps to ensure that minority members are not left behind if a sale of the company occurs. It also serves as a mechanism to protect minority members’ interests during disputes and offers them an exit strategy should they choose to leave the company. While it may seem like a minor detail, a tag-along provision can be an essential component of any operating agreement.