Meaning
Contractual provisions in a shareholders’ agreement allow minority investors to block the compulsory sale of their equity despite the exercise of exit rights by a majority group. A drag along override functions as a protective shield for specific holders who would otherwise be forced to participate in a merger or acquisition on the same terms as the founders. It establishes a threshold or condition that must be met before the majority can compel a full exit.
Protection Trigger
Specific price floors or return multiples often activate the right to refuse the sale. When the offered valuation falls below a predetermined amount, the drag along override prevents the lead investors from delivering one hundred percent of the company to a buyer. This ensures that early-stage backers or strategic partners do not lose their position for an insufficient return.
Negotiation Influence
Holding this right grants a minority shareholder considerable influence over the final terms of a liquidity event. Because a buyer usually demands the entire share capital, the presence of a drag along override forces the majority to negotiate a better deal for the dissenter. It shifts the power dynamic during late-stage talks.
Instrument Definition
Articles of association or a side letter record this clause between major stakeholders. It explicitly limits the standard drag rights found in venture capital documents. The provision defines the exact boundary of majority authority over minority assets.
