In the ”life” of a company, the inevitable often happens and the shareholders decide to sell their shares; if we are to borrow Marin Preda’s vision, this is the equivalent to destabilising the balance within a company. Thus, the affectio societatis is lost between the original parties and arises between the newcomers.
In this equation, we are interested in the position of minority shareholders, who must be granted increased protection compared to the one established by law. On the other hand, there may be situations in which the opposition of the minority shareholders makes it impossible to conclude sale contracts, a situation in which the majority shareholders must be granted adequate means of coercion.
When the legislator omits – intentionally or not – to intervene in such cases, nothing prevents the parties to the regulate these aspects. In the end, the freedom to conclude contracts is (more) liable.
In what follows, we develop the means that the shareholders have at their disposal for the conventional regulation of the position of minority shareholders, in the situation of the sale of shares.
Pro majority shareholder clause – ”drag-along”
The drag-along clause grants the shareholder – the majority shareholder, most of the time – in the context of the sale of their shares, the right to oblige the other shareholders to sell their holdings in the company to the same buyer, under the conditions and at the price dictated by the majority shareholder.
Once this right is included in the articles of association, the other shareholders – the minority shareholders, as a rule – must comply, in the sense that, upon the simple notification received from the shareholder holding the drag-along right, they will sell their own shares at the price and on the conditions dictated. Practically, in such a situation, the object of sale will, as a rule, include all the shares of a company.
Of course, nothing prevents the parties from regulating ab initio a minimum price or even a set of predefined conditions (for example, the criteria that the prospective buyer must meet), in order to avoid arbitrariness. The rules for setting the price are also borrowed from the sale contract, in the sense that the price can be determined by a third party – predetermined or not.
The situation can be assimilated to the pre-contract of sale or, more specifically, to the option agreement, which establishes in advance the price of the sold good and the terms of sale (for details on the qualification of the drag-along agreement, see D. Ciobanu, Short considerations related to the forced execution of “drag-along” and “tag-along” agreements, article published in the Romanian Journal of Jurisprudence no. 2/2012).
The reasoning behind the drag-along agreement or clause is to provide the possibility of a block sale of all of the shares in a company.
In addition, the original seller will be pleased to have obtained the consent of the others in advance, rather than at the time when an opportune sale is expected, a sale which could be blocked by the opposition of the other shareholders.
On the other hand, such a situation no longer exposes the buyer to the foreseeable opposition of the remaining shareholders following the change of the majority shareholding, on the occasion of the execution of the company’s specific acts.
By concluding agreements, non-execution remedies can also be regulated and are even recommended. We refer, with priority, to the means available to the holder of the drag-along right, in situations where those bound under this agreement or clause refuse to conclude (sign) the sales contract, after being notified.
If the concern of non-execution arises only later and such remedies are not regulated between the parties, the case will inevitably end up before a court of law. In accordance with the specialised legal doctrine [D. Ciobanu, article cited above], we believe that the performance of the drag-along agreement follows the contractual remedies specific to the pre-contract of sale. For example, in the case of joint-stock companies, this will give rise to a judicial action by which the court is requested to issue a decision to uphold the contract.
Effective remedies will, of course, be determined on a case-by-case basis, depending on the challenges faced by our clients. That is why, for the time being, we conclude by citing a popular statement: prevention is the best treatment; therefore, in the absence of expeditious legal means, the remedies for the non-execution of the drag-along clause must be regulated in advance, directly through agreements.
Pro minority shareholder clause – „tag-along”
Unlike the drag-along clause, the tag-along clause is an advantage for the minority shareholder and is based on the idea of the good functioning of the company, which cannot exist in the absence of an appropriate relationship between the shareholders.
In other words, the tag along clause seeks to protect affectio societatis, which determined the partners to associate and which is the essential element of the association, that consists in the intention of the associates to collaborate in achieving the common goal consisting in obtaining benefits to be shared between them. Therefore, the establishment of a company is based on the intention of voluntary collaboration of the shareholders, to work together and bear all the risks of the commercial activity, from positions of legal equality.
In case of a sale of shares, most of the time, it is possible that the affectio societatis is affected, in the sense that the minority shareholders will not want to continue the activity in the event of a change of majority shareholders. Moreover, in such cases, minority shareholders may see their rights prejudiced, including from the perspective of the depreciation of the minority stake they hold.
In order to prevent these situations, through the articles of association or through separate agreements, the shareholders can regulate these aspects, by inserting tag-along clauses, which give the minority shareholder protection in the situation where the majority shareholder will receive a purchase offer for their shares. Thus, in the specific case where a third party will make a purchase offer to the majority shareholder, the minority shareholder can demand that the third party buys the shares they own within the company, under the same conditions and at the same price as the one offered to the majority shareholder. The nature of the tag-along right is that of an option agreement, in accordance with the provisions of Article 1.278 of the Romanian Civil Code.
Although less common in limited liability companies, these types of clauses provide real benefits to both the majority shareholder and the minority shareholder.
One advantage consists in the possibility of obtaining an advantageous price in the case of the sale of the entire package of shares, an aspect that will exclude a possible intrusive refusal on the part of the minority shareholder. In this context, the minority associate will be able to obtain real financial advantages by selling at a higher price and will be able to refuse, under disadvantageous conditions, the collaboration with a partner they dislike.
Also, we must not overlook the fact that the insertion of this clause will also bring advantages to the third-party buyer, who will be able to close the transaction in a shorter period of time and who will be much more interested in acquiring the entire package of shares.
Regarding the actual mechanism through which the tag-along right works, we must specify that this right is exercised through the communication made by the majority shareholder who intends to transfer the shares held within a company, of a notification to the minority shareholders. Mandatorily, the notification sent by the majority shareholder will include details regarding the identity of the third party buyer, the price offered by them, as well as the commercial terms of the transaction.
After receiving the notification, the beneficiaries of the tag-along right will communicate to the majority shareholder, through a notification, their intention to exercise this right and to sell the shares held by them in terms and conditions similar to those offered by the third party buyer to the majority shareholder intending to transfer.
It is important to specify that the majority shareholder will not be able to transfer the shares held in the company unless the third party purchaser also acquires the shares held by the minority shareholders under the conditions offered to the first, but depending on the specifics of the form of association, there may be some impediments to the sale, such as the opposition of the associates benefiting from the tag-along right to vote in the general assembly of associates on the transfer intended by the associate in question and block the transaction, impediments that may be prevented by their strict regulation in agreements between the shareholders.
In conclusion, depending on the circumstances of the case, we believe that such clauses should be frequently inserted in the constitutive acts of the companies, as they allow the safeguarding of the company in situations where the associates reach irreconcilable differences.
This article was drafted, for the Costaș, Negru & Asociații – Lawyers’ Civil Partnership blog, by Atty. Maria Tușa and Atty. Irina Galiș, both affiliated to the Cluj Bar Association.
Costaș, Negru & Asociații is a lawyers’ civil partnership with offices in Cluj-Napoca, Bucharest and Arad, providing legal assistance, representation and consultancy in a number of practice areas with a team composed of 13 lawyers and consultants. Details regarding legal services and the members of the team can be found on the website https://www.costas-negru.ro. All rights for the materials published on the company’s website and on social media belong to Costaș, Negru & Asociații, their reproduction being allowed only for information purposes and with the correct and complete disclosure of the source.