A drag along clause lets the holders of an agreed majority force the remaining shareholders to sell to a buyer on the same terms, so a sale of the whole company can go ahead. A tag along clause works the other way round: if a controlling holder sells, the minority can insist the buyer takes their shares too, on the same terms. Outside a formal takeover offer, the Companies Act 2006 gives neither right, so both have to be written into the articles or a shareholders’ agreement.

Why do buyers and investors care about these clauses?

Most buyers of a private company want 100% of the shares. Without a drag along, one small holder who refuses to sell can block the deal or hold out for a better price. The statutory squeeze out in section 979 only helps a buyer who has made a “takeover offer” within section 974 (an offer for all the shares, or all of a class, on the same terms) and has received acceptances for at least 90% of the shares by value and, for voting shares, 90% of the voting rights. Many private sales are negotiated with a handful of holders rather than run as a formal offer, so that route is often unavailable or impractical.

Minority holders face the opposite risk. If the founder sells a controlling stake, the minority can be left locked into a company run by a stranger, with no market for their shares. A tag along gives them the same exit at the same price. HMRC’s own definitions, in the memorandum of understanding with the BVCA reproduced at ERSM30520, capture the point neatly: a tag along gives managers the right to sell if the investor or someone else agrees to sell, and a drag along requires managers to sell if other parties arrange to sell.

How does a drag along work, step by step?

Clauses vary, but a typical drag along runs like this:

  1. Trigger. Holders of a stated percentage of the shares (the “dragging” shareholders) receive a bona fide offer from a third party for all the shares and accept it for their own.
  2. Drag notice. They serve notice on every other holder stating the buyer, the price per share, the form of consideration and the completion date.
  3. Same terms. The dragged shareholders must sell on the same terms per share, adjusted where the articles give different classes different entitlements on a sale.
  4. Completion. Each dragged holder delivers a signed stock transfer form and share certificate. If they do not, the articles usually appoint a director as their agent to sign on their behalf, and the company holds their sale proceeds for them.
  5. Registration. The buyer is entered in the register of members. Under section 771 the company must register a transfer, or give reasons for refusing, within two months of it being lodged.

Two drafting points carry the most weight. First, what the dragged holders must sign: a well drafted clause limits them to warranties on title and capacity, not full business warranties. Second, what counts as “the same terms” where the buyer offers shares rather than cash. If the buyer issues its own shares in exchange, section 135 of the Taxation of Chargeable Gains Act 1992 can treat the exchange as a reorganisation, with no immediate gain, where the buyer ends up with more than 25% of the ordinary share capital, the greater part of the voting power, or makes a general offer that would give it control. See share for share exchanges.

How does a tag along work?

A tag along is a restriction on the selling majority. The usual form says that a holder may not transfer shares that would give the buyer control (often defined as more than 50%) unless the buyer has made an unconditional offer to every other holder to buy their shares at the same price and on the same terms. Some clauses use a pro rata version instead, where each minority holder can sell the same proportion of their shares as the majority is selling.

Because the restriction lives in the constitution or a contract, the practical enforcement point is the share register. The model articles for private companies let directors refuse to register a transfer (article 26(5)), and bespoke articles normally require them to refuse where the tag along has not been honoured. Transfer restrictions generally are covered in transferring shares.

How do contractual rights compare with the statutory squeeze out and sell out?

Contractual drag or tag Statutory squeeze out or sell out
Source Articles or shareholders’ agreement Sections 979 to 986 of the Companies Act 2006
Threshold Whatever the clause says 90% by value and, for voting shares, 90% of voting rights
Needs a takeover offer No Yes, as defined in section 974
Timing Set by the clause Squeeze out notice within three months of the last day the offer can be accepted (section 980); a minority sell out right lasts three months from the end of the offer period or later notice (section 984)
Court route Ordinary contract or unfair prejudice claims A squeezed out holder can apply within six weeks (section 986); the court cannot order less than the offer value, and can order more only if the holder shows the offer value is unfair

The statutory sell out in section 983 is the closest thing to a tag along in the Act: once the offeror holds 90%, a holder who did not accept can require the offeror to buy them out. It only arises after a takeover offer, which is why minority investors still negotiate a contractual tag.

Why do minority investors want them, and what should they negotiate?

Professional minority investors usually want both. The tag gives them an exit if the founders sell out. The drag, often exercisable by the investor alongside a majority of the founders, lets them force a sale later if the founders will not. From the other side of the table, a minority holder who may be dragged should look for:

  • a threshold high enough that the controlling holder cannot drag alone;
  • a minimum price or the investor’s consent, so the company cannot be sold cheaply to a connected party;
  • the same price per share and the same form of consideration as the dragging holders, with any cash alternative offered to all;
  • warranties limited to title and capacity, and liability capped at their own proceeds;
  • no obligation to give restrictive covenants they are not paid for;
  • a clear treatment of option holders and anyone who acquires shares after the drag notice is served.

How do you add these rights to an existing company?

Rights in the articles bind the company and every member as if each had covenanted to observe them (section 33), including people who become members later. Articles are amended by special resolution (section 21), which needs at least 75% of the votes (section 283). The amended articles must reach Companies House within 15 days of the change taking effect (section 26), and the resolution itself within 15 days of being passed (section 30).

A shareholders’ agreement binds only the people who sign it, so new holders must sign a deed of adherence or the clause does not reach them. That is why drag and tag rights are usually put in the articles as well. A majority that adopts a drag along aimed at squeezing out a particular holder on poor terms runs the risk of an unfair prejudice petition under section 994. The wider document is covered in shareholders’ agreements.

What tax points come up?

A dragged shareholder is making an ordinary disposal for capital gains tax, so the usual rules and any claim to Business Asset Disposal Relief apply as they would on a voluntary sale. For employees who hold shares, drag and tag rights are restrictions on the shares, which raises the question whether they reduce market value under the restricted securities rules. In the BVCA memorandum of understanding at ERSM30520, HMRC accepts that where managers’ shares are subject to tag along and drag along restrictions, those restrictions do not depress the value of the shares. See employment related securities.

How does it work in practice?

Illustration only. A company’s shares are held 70% by the founder, 20% by an investor and 10% by an employee. The articles contain a drag along exercisable by holders of 75% and a tag along triggered by any sale that gives a buyer more than 50%.

  • A buyer offers £5 per share for 100%. The founder alone cannot drag, but the founder and investor together (90%) can. The employee must sell at £5 per share.
  • Instead, the buyer offers the founder £6 per share for her 70% only. The tag along means she cannot complete unless the buyer offers the investor and the employee £6 per share for their holdings too.

What are the common mistakes?

  • Putting the rights only in a shareholders’ agreement and then issuing shares to someone who never signs it.
  • Articles and shareholders’ agreement setting different thresholds or procedures.
  • No power of attorney or agency provision, so a refusing holder can still stall completion.
  • Failing to say how proceeds are split between share classes with different rights.
  • Tag triggers drafted so widely that intra group or family transfers set them off.
  • Serving a drag notice that does not follow the clause, giving the dragged holder grounds to resist.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.