"Drag Along" and "Tag Along" rights are used by investors to facilitate their exit from an investment.

They are methods particularly favored by private equity firms, who almost always do their best to establish a clear exit strategy even before they decide on investing in a company.

A Tag Along is relatively non-controversial: it gives a shareholder the right (but not necessarily the obligation) to exit along with another shareholder when that other shareholder is exiting, usually on the same price and terms.

This helps avoid any shareholder involuntarily finding himself or herself with a different co-shareholder to originally expected. Tag Along rights are often requested by minority shareholders, as they allow them to then exit at the same time as majority shareholders, and to share the control premium (eg. investors are usually prepared to pay a higher price per share when they acquire control of a company).

Drag Along rights are more controversial. A Drag Along right gives the investing shareholder the right to force the other investor(s) to exit should the investing shareholder exit, once again, usually on the same price and terms.

For private equity investors, Drag Along rights are usually a sine qua non for any investment. Some private equity investors affectionately refer to their Drag Along rights as their "nuclear option." On the other hand, for many business owners, a Drag Along right represents a Damocles sword, a threat that they may be forced to sell their business if the investor decides to drag him or her along, usually at a valuation over which he or she has no control.

Unfortunately, perhaps a majority of owners of businesses who seek private equity investment for the first time are not even aware of the existence of Drag Along rights; very often when business owners find out about Drag Along rights being required by an investor, that is the end of the discussion.

Sometimes, that discussion is ended a little prematurely; it is worth spending a little time exploring whether there may be a compromise solution acceptable to all parties, which may mitigate (although not completely eliminate) the risk that business owners are dragged along against their will. This will require astute negotiation. A few examples of such compromise solutions might include a combination of the following measures:

• An obligation for investors to seriously attempt one or more methods of selling their interest without dragging along another shareholder;

• The Drag Along may be available only after the expiry of a particular time period (eg. after four or five years from the date of the investment);

• Exercise of the intent to exercise a Drag Along right may require advance notice to other shareholder(s). Such notice may also be structured to allow the remaining shareholders the right to purchase the shares of the shareholder giving notice according to a particular formula (eg. EBITDA multiple).

• It might be possible to structure a Drag Along in such a manner that it might be overridden by a right of first refusal (eg. where one investor negotiates an agreement to sell shares to an outside investor, the existing shareholders would have a defined period within which to step in and buy on the same terms). However, not every investor will accept a right of first refusal, as this may diminish the marketability of the investor's interest. Also, for a first right of refusal to be of real benefit to a shareholder, it will usually require a cash reserve in order to exercise it.

In a nutshell, the negotiation between an owner and investor with respect to Drag Along rights is a function of the relative bargaining strength of the parties and their negotiating ability. It balances the legitimate desire of an investor to exit from an investment at a time that suits them (minority investments in particular may be extremely difficult to exit without a Drag Along) with the legitimate right of a business owner not to have his or her interest in a business sold against his or her will.

A condition precedent (CP) prior to closing is a condition that must be satisfied by a party to a transaction, failing which the other party is not bound to close the transaction. In the context of buying or selling a company, it is usually the vendor of a business who must satisfy certain CPs before the investor is obliged to close; but there may also be conditions precedent that an investor must satisfy before the vendor is obliged to close.

On rare occasions, it is possible to close a transaction immediately upon signature of a Sale and Purchase Agreement (SPA); more often, however, there is a delay of a few weeks to a few months from the signature of the SPA to closing, primarily due to the need for parties to the transaction to satisfy CPs.

While it is impossible to provide an exhaustive catalog of all the types of CP that a vendor may need to satisfy, a sample of some of the more common CPs offered by a vendor could be:

(a)Obtaining consent of banks: Usually there is a clause in any bank loan agreement or similar financing facility that a change in ownership in and/or control of a company requires written consent of the bank(s). Vendors are usually reluctant to approach banks (and indeed banks are often reluctant to consider such cases) until there is a signed SPA.

(b)Client approvals: There are times when contracts with key clients also contain change of control provisions.

(c)Approvals from other selling shareholders: Sometimes other shareholders of the company being sold have pre-emption rights, which are best dealt with during this period.

(d)Obtaining approval of Competition Office: If Competition Office approval is required, most Competition Offices in Central Europe or in any other EU country are not prepared to consider an application until an SPA has been signed by all parties.

(e)Restructuring: At times, certain restructuring events must be carried out prior to closing, such as the creation of a holding company, or the transfer of a subsidiary or real estate that is not included in the transaction.

(f)Curing defects to title: Should the Vendor not have clear title to real estate or other assets, this can be made into a CP.

(g)Regulatory approvals: The transfer of ownership of a telecommunications or utility company, for example, often requires approval of the ministry regulating the industry.

CPs might also be used to provide the vendor with time to fix problems that emerged during due diligence (for example, if the company's environmental or other permits were not in order). It is better for a vendor to fix problems prior to or during due diligence, because failure to do so will either lead to postponement of signature of the SPA, or give the investor a possible exit from the transaction in the form of a CP.

Very often no CPs are provided by an investor to the vendor. To the extent that there are such CPs, these are usually "light." For example, the investor may need to take the signed SPA before his board, supervisory board, or investment committee for approval, and this may form the basis for a CP.

The time between signature of SPA and closing may also be used for the investor to meet with the management of the company being acquired, possibly negotiating and signing new employment agreements with management. For vendors it is important to note that during the period between the signing of the SPA and closing the target company must be managed in the ordinary course of business Any material transactions outside the scope of the ordinary business require the approval of the investor.

Although the SPA is almost always a legally binding agreement, my advice is not to count chickens before they hatch. There is many a slip between cup and lip.

There may be bona fide business reasons for CPs not being capable of being satisfied (eg. the bank does not approve transfer to the new owners).

Nor should the binding nature of the agreement be treated lightly - a party who does not use best efforts to close the transaction or who exercises bad faith will quite probably find himself or herself in litigation or arbitration, and probably on the losing end. Hence all parties are well advised to try very hard to satisfy the CPs.

At or prior to closing, the lawyers from all sides will go through all CPs as set out in the SPA and ensure that these have been satisfied. The CPs become part of the checklist required for closing. Indeed, if all CPs have been satisfied, both sides are usually legally bound to close.