Getting PE Deals In The UK Across The Line, Part 1: Drag Alongs

• Published date: 02 July 2021
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Law Firm: Morrison & Foerster LLP
• Author: Mr Simon Arlington and Benjamin Mark-Alexander Beswick

Fast growing companies that reach exit velocity in record time are particularly attractive to PE investors. However, buyer beware! These companies may have received investment from a number of different sources and have a wide shareholder base. In a number of high-growth tech or IP heavy companies, the original developers of key IP may feel that they have not been appropriately compensated for their work. When an acquirer comes along, they may consider holding out for better terms, leaving investors with additional hurdles to overcome to successfully complete the transaction.

Drag along provisions are one way of circumventing this issue in the UK. In this article, we consider the practical steps required to enforce a typical drag along provision.

This article is the first of a two part series. Also read the second part, "Getting PE Deals in the UK Across the Line: Alternative Approaches".

Drag Along - Two Approaches

There can be both an informal and formal procedure to be followed when seeking to drag minority shareholders.

Informal Approach

Buyers will expect the sellers to resolve any potential issues amongst a target's shareholder base. They may make suggestions as to the approach to be taken, but will be keen to maintain some distance from the process.

Informally, a seller might remind potentially difficult minority shareholders that there is a drag along provision that could be used to force them to sell their shares. A seller might suggest that, to save time, cost and unnecessary paperwork, it would be better for those shareholders to agree to sell their shares under the terms of pre-prepared transaction documents instead. In some cases, where this is not at first acceptable to a minority shareholder, some form of consideration, together with a settlement agreement, might help tip the balance.

Formal Approach

If an informal approach fails, or if it is impractical due to the sheer number of minority shareholders, then a formal procedure, dictated by the drag along provision, will need to be followed. A written notice will need to be sent to the minority shareholders to be dragged. To enforce the drag along provision, there is also often a requirement that there is a bona fide third-party purchaser seeking to purchase 100% of the shares, so as to prevent existing shareholders from abusing the provision to force out minority shareholders.

In all cases, where there are potential hold-out shareholders, the target company (together with its majority...