Attorney Dr. Fahad Al-Shammari

Minority shareholders or partners often face the risk of being excluded from a transaction in which majority shareholders or partners sell their stake in a company to a potential buyer. In many cases, the majority’s shares are sold at a price premium, allowing them to exit the company with maximum benefit, while minority shareholders remain with the new buyer. Conversely, minority shareholders or partners may refuse to sell their shares or interests to the new buyer due to their intransigence or unwillingness to exit the company, which may in turn deter the potential buyer from completing the acquisition of the target company.

To eliminate these concerns affecting minority shareholders, commercial practice has developed certain contractual provisions that may be included in the company’s articles of association or agreed upon among shareholders in a Shareholders’ Agreement. These provisions are known as Drag-Along Rights and Tag-Along Rights.
The first is a contractual clause typically included in the articles of association or in a shareholders’ agreement, allowing majority shareholders to compel minority shareholders to sell their shares if the company is sold to any future buyer, even if the minority does not participate in the transaction.
The second clause, the Tag-Along Right, grants minority shareholders the right to require the buyer to purchase their shares at the same price at which the majority sold its shares to the buyer.

These two clauses achieve several practical advantages for the majority. First, they enable the majority to sell the company to a new investor without obstruction by the minority. Second, minority shareholders receive the same price obtained by the majority, even though they did not negotiate the transaction themselves, thereby ensuring equal treatment.

From the company’s perspective, including such clauses in the articles of association or in a shareholders’ agreement enhances the company’s attractiveness to investors when it is successful. This is because investors typically seek full control over a company, rather than acquiring only 70% or 80% of its capital. The absence of such clauses may discourage investors, as minority shareholders could later obstruct the investor after the majority stake has been acquired. In addition, these clauses provide legal and financial protection to minority partners, who are usually in a weaker bargaining position during a sale. The clauses ensure that minority shareholders receive a fair price for their shares.

Regarding the applicability of these clauses within the Kuwaiti legislative environment, Article 30 of Kuwaiti Companies Law No. 1 of 2016 expressly permits shareholders and partners to enter into binding agreements among themselves. The article explicitly states that “a shareholders’ agreement shall be binding on its parties.” It is worth noting that prior to its amendment in 2019, Article 30 required that the provisions of a shareholders’ agreement must not contradict the mandatory rules of the Companies Law. However, in 2019 this condition was removed, thereby providing a sound legislative basis for the inclusion of such clauses within the Kuwaiti commercial environment.

It is often argued that such clauses violate a fundamental legal principle, namely the inviolability of property rights and the prohibition against forcing a shareholder or partner to sell their shares or interest. This argument can be rebutted by noting that Companies Law No. 1 of 2016 is a special law that prevails over the general law, namely the Civil Code. Moreover, the legislative amendment introduced in 2019 to Article 30 expressly permits shareholders’ agreements to contradict the mandatory provisions of the Companies Law.

Given the importance of these clauses, the Supreme Court of India, in the case of Vodafone International Holdings BV v. Union of India, ruled that drag-along and tag-along clauses are binding on company parties and investors even if they are not included in the company’s articles of association, in deference to the commercial and investment intent agreed upon by the parties.

Attorney Dr. Fahad Al-Shammari
Professor of Commercial Law, Kuwait University
This email address is being protected from spambots. You need JavaScript enabled to view it.