One of the most negotiated items when investing in a company is exit arrangements.Drag along right— the right to drag along or the right to force a joint sale — allows the majority shareholder to sell the company to a buyer while forcing minority shareholders to participate in the sale under the same conditions. The goal is simple: the buyer often wants the entire company, so that a small minority shareholder alone cannot block the sale.
In this article, we explain step by step what the drag along right is, what legal basis it is based on in Turkish law, where it should be written in joint stock and limited companies, what elements it must have in order to be valid, and what can be claimed when it is violated.
What is the drag along right?
Drag along, in case the majority shareholder sells his shares to a third party, minority shareholders also sell their shares.with the same price and same conditions is the power to force sales to the same buyer. The opposite institution is known as tag along: where the minority agrees to participate in the sale of the majority on the same terms.requests. One is coercion, the other is the right to participate, and they are often regulated together in contracts.
In practice, this right usually comes into play in the following cases:
- Securing the investor’s exit after venture capital investment
- Ensuring that the company can be sold as a whole in family businesses
- Determining the exit scenario of the parties in joint ventures from the beginning
Is the right to drag along valid in Turkish law?
There is no regulation called “drag along” in the Turkish Commercial Code. This does not mean that the right is invalid; Its basis is freedom of contract. Turkish Code of Obligations No. 6098 art. According to Article 26, the parties can freely determine the content of a contract within the limits prescribed by law. Article of the same law. Article 27 states that contracts that violate the mandatory provisions of the law, morality, public order or personal rights are absolutely void. So drag along right is valid as a rule; Limits are mandatory provisions.
The main thing is your right
It is written as where to and here the distinction between joint stock company and limited company is made.
Situation in joint stock company
Freedom of articles of association is limited in a joint stock company. Turkish Commercial Code no. 6102 art. Pursuant to Article 340, the articles of association may deviate from the provisions of the Law regarding joint stock companies only if this is expressly permitted in the Law. Since there is no provision in the law that explicitly allows drag along, writing this right into the articles of association is controversial and may cause problems during the registration phase.
On the other hand, the articles of association may limit the transfer of registered shares. Turkish Commercial Code art. Article 493 regulates that the company may reject the transfer approval request by citing an important reason stipulated in the articles of association or by offering the transferor to purchase its shares at their real value. However, the last paragraph of the same article is clear: the articles of association cannot aggravate the transferability conditions. For this reason, drag along in a joint stock company is more important than the articles of association.shareholder agreement is written.
Situation in limited company
The scope of action is wider in a limited company. Turkish Commercial Code art. 577, while enumerating the binding records if they are stipulated in the company contract, regarding the basic capital shares of the partners or the company.
It also counts the recognition offer, pre-emption, repurchase and purchase rights among these records. Since the drag along mechanism is practically built with a right to buy and a commitment to sell, it is possible to write this right into the company contract in a limited company, and when written, it binds the partners.
The form of share transfer is also important: Turkish Commercial Code art. According to Article 595, the transfer of the capital share and the transactions giving rise to the transfer debt are made in writing and the signatures are approved by a notary. In addition, unless otherwise stipulated in the company agreement, general assembly approval is required for the transfer. In other words, even when drag along is operated, the transfer does not occur automatically, bypassing these formalities and approval conditions.
Does drag along automatically rev?
No — and this is the point where most mistakes are made in practice.
The approach of the 11th Civil Chamber of the Supreme Court of Appeals regarding framework agreements between shareholders sheds light on this issue. The Department considers that a contract signed between partners, which includes mutual commitments regarding share ownership and management, is not a share transfer contract, but a contract determining how the transfers will take place.
It has the quality of framework contract; He accepted that such a contract is valid but does not transfer ownership of the shares alone. In another decision, he emphasized that a duly drawn up share transfer agreement is valid and binding between the parties (transferor and transferee), and asserting this against the company is a separate issue.
The practical implication of this in terms of drag along is that the contract does not force you to sell to the minority.
returns right to request; If the minority refrains from signing, its shares do not automatically pass to the buyer. That’s why your text tells you how your right is will be executed should also be edited.
How to write a valid and working drag along clause?
A solid arrangement includes these elements:
- Trigger threshold: The share ratio in which the right arises in the sale (for example, a sales offer covering 51% or 75% of the capital).
- Equal conditions assurance: The minority, the majority with the same price, same payment terms and same commitments will participate in the sale. This is the most important element that makes it easier for the article to pass the integrity audit.
- Minimum price or valuation method: Independent valuation or floor price mechanism.
- Notification and deadlines: Form of notification in which the right is exercised, response time allowed to the minority, closing schedule.
- Execution mechanism: An issued power of attorney, right to purchase and/or penalty clause in case the minority refrains from signing.
- Compliance with shape requirement: How to ensure notary approval and general assembly approval in a limited company.
The compatibility between the investment agreement, shareholders agreement and company agreement should also be checked; If these documents conflict with each other, the article may remain inoperative. Preparation and negotiation of such fictionscommercial and corporate lawarea; for penal clause, power of attorney and performance dimension
You can also look at our pagelaw of obligations and contracts.
What can be claimed if drag along is violated?
If the minority shareholder does not fulfill its contractual obligation to sell, the claims are contractual:
- Exactly: It may be requested that the declaration of intent regarding share transfer be provided by court decision.
- Penalty clause: If it is agreed in the contract, damage can be requested without needing to prove it; Proof is required for excess damage.
- Compensation: Loss incurred due to non-fulfillment of the sale.
For this reason, in well-written contracts, auxiliary tools (power of attorney in the form of a regulation, escrow/escrow arrangement, right of purchase) that will ensure the actual completion of the transfer in case the right is exercised are foreseen from the beginning.
Common mistakes
- Trying to write the article into the articles of association of the joint stock company. There may be problems with registration due to the principle of mandatory provisions; The right place is often the shareholders’ agreement.
- Bypassing the equal terms assurance. Articles that require the minority to be forced to sell under worse conditions than the majority are controversial in terms of the rule of honesty.
- Not putting a price mechanism. Expressions such as “at the price the majority deems appropriate” increase the conflict.
- Not providing a means of execution. Just saying “obliged to sell” does not work on closing day.
- Forgetting the shape requirement. If the chain of notary approval and general assembly approval is not established in a limited company, the process will be blocked.
Frequently Asked Questions
What is the difference between drag along and tag along?
Drag along the majority to the minority
Allows force; Tag along is the sale of the majority to the minority under the same conditions.join grants the right. The first ensures that the buyer can acquire the entire company, and the second ensures that the minority is not left out.
Can the drag along clause be written into the articles of association of a joint stock company?
Turkish Commercial Code art. Due to the principle of mandatory provisions in Article 340, this is controversial and may raise registration issues. In practice, in joint stock companies, rights are written into the shareholders’ agreement.
Can drag along be written into the company agreement in a limited company?
Yes. Turkish Commercial Code art. 577 accepts the granting of pre-emption, repurchase and purchase rights to partners or the company as binding, provided that they are provided for in the company contract; drag along fiction can be built on these rights.
What happens if the minority shareholder refuses to sell his share?
Shares do not transfer automatically. Exact performance, penal clauses and compensation may be requested based on the contract; Therefore, it is important to provide enforcement tools such as power of attorney or right of purchase in the contract.
Is it mandatory to provide a minimum price guarantee to the minority regarding drag along?
There is no such obligation in the law; However, the assurance of equal terms and reasonable valuation provides strong protection in terms of the validity and enforceability of the clause.
Can a foreign investor use drag along in a Turkish company?
Yes. There is no specific prohibition on foreign investors in terms of shareholding; The same rules apply when the contract is subjected to Turkish law. It is sufficient to issue a power of attorney to carry out the transfer transactions in Turkey.
This article has been prepared to provide general information about Turkish law; It does not constitute legal advice. Each investment and shareholders agreement must be evaluated on its own terms. We recommend that you consult a lawyer for your specific situation.
