When investors or business partners enter a company, they often look beyond day-to-day operations and consider what will happen when someone wishes to exit. In Malaysia, two important contractual mechanisms that address this issue are tag-along rights and drag-along rights. While not expressly provided for in the Companies Act 2016, these rights are typically included in shareholders’ agreements to ensure fair treatment during the sale or transfer of shares.

Tag-along rights are designed to protect minority shareholders. If a majority shareholder decides to sell their stake to a third party, tag-along rights allow minority shareholders to “tag along” and sell their shares on the same terms and conditions. This ensures that minority shareholders are not left behind in a company controlled by new owners they did not choose. For example, if a majority shareholder sells their stake at a premium, minority shareholders with tag-along rights can also enjoy the same premium price. Without this protection, minority shareholders may find themselves stuck in a company with reduced value and diminished influence.

On the other hand, drag-along rights favour majority shareholders. If a majority shareholder wishes to sell their stake to a third party, drag-along rights allow them to “drag” minority shareholders into the sale, forcing them to sell their shares on the same terms. This prevents minority shareholders from blocking a sale that could benefit the company or all investors. Drag-along rights are particularly useful in mergers and acquisitions, where potential buyers often require full ownership or a controlling interest to proceed with the deal.

Together, tag-along and drag-along rights strike a balance between protecting minority shareholders and enabling majority shareholders to execute strategic exits. They provide clarity, reduce disputes, and ensure that all shareholders are treated fairly during major transactions. For this reason, well-drafted shareholders’ agreements in Malaysia often include both provisions, tailored to the specific needs of the company and its investors.

It is important to note that these rights must be carefully drafted to avoid ambiguity. Clear definitions of triggering events, minimum thresholds of shares, and timelines for exercising rights are essential. For instance, a tag-along clause should specify whether all minority shareholders must be offered the opportunity to sell or only those holding a certain percentage. Similarly, drag-along clauses should outline whether they can be triggered by a simple majority or a supermajority.

For shareholders, having tag-along and drag-along rights in place provides certainty and peace of mind. Minority shareholders gain assurance that they will not be disadvantaged in an exit, while majority shareholders secure the flexibility needed to pursue strategic deals. From a legal perspective, these rights demonstrate good corporate governance and help avoid costly disputes in the future.

In conclusion, tag-along and drag-along rights are powerful tools for managing shareholder exits in Malaysia. Though contractual rather than statutory, they are widely recognised as essential features of modern shareholders’ agreements. By adopting these rights, companies can ensure fairness, protect shareholder value, and provide stability in times of transition.

Written by Lawyer Khoo, Ng, Zainurul, Seke & Khoo