13 Feb Drag-Along, Tag-Along and Good/Bad Leaver Clauses in Spanish Companies

In one of our previous posts, we analyzed shareholders’ agreements, particularly partnership agreements and family agreements. One of the most important aspects of these arrangements is the regulation of shareholders’ exit mechanisms, especially within the startup ecosystem, where founders, investors, and key employees coexist with aligned interests that may become conflicting in the future.

Experience shows that many projects do not fail because of the product or the market, but rather due to internal conflicts arising from poor corporate planning. It is precisely in this context that clauses such as drag-along, tag-along, good leaver, and bad leaver become particularly relevant. These are protective mechanisms which, when properly structured, help prevent deadlocks, shareholder disputes, and loss of value at critical moments.

1. Drag-Along and Tag-Along Clauses: Collective Exit of Shareholders

Drag-Along Clause

It serves as a protection mechanism for majority shareholders. It allows shareholders holding a certain percentage of the share capital, in the event of an acquisition offer for the company, to compel the remaining shareholders to sell their shares under the same terms, thereby preventing a minority shareholder from blocking the transaction.

In such cases, all shareholders are required to transfer the entire company, which facilitates the transaction from the buyer’s perspective and maximizes its value.

Certain practical issues must be considered, such as establishing a minimum capital threshold, regulating the sale price, or excluding as potential buyers persons directly or indirectly related to the selling shareholders.

Tag-Along Clause

Unlike drag-along rights, the tag-along clause does not impose a sale but grants minority shareholders the right to join the majority shareholder when the latter decides to transfer its stake to a third party, selling under the same conditions. This prevents minority shareholders from being “trapped” in the company with an unwanted new partner.

Among other practical considerations, it is important to regulate access to the terms of the transaction and the proportional allocation mechanism where the purchaser does not intend to acquire more shares than those initially offered.

For years, there was debate regarding the inclusion of such clauses in the company’s bylaws, as they were typically relegated to shareholders’ agreements. However, today, with proper drafting and structuring, both may be included in the company’s internal documents. For instance, the Resolution of May 20, 2016, issued by the Spanish Directorate General of Registries and Notaries, recognizes the possibility of registering a specifically structured tag-along clause.

Practical Example

Startup XYZ is composed of the following shareholders:

• Shareholder A – 40%
• Shareholder B – 55%
• Shareholder C – 5%

Drag-along: An investment group makes an offer to acquire 100% of the company. Shareholders A and B are willing to sell their stakes, but Shareholder C opposes the transaction. To avoid a deadlock, A and B exercise their drag-along right, compelling C to sell under the same terms.

Tag-along: In a different scenario, if Shareholder A decides to retire and sell its stake to a third party, Shareholder C, even if initially not intending to exit, may exercise its tag-along right and join the sale, jointly offering 45% of the share capital.

2. Good Leaver and Bad Leaver Clauses

Beyond exits arising from M&A transactions, in startups it is equally important to regulate the departure of key shareholders (founders or working partners) depending on the reasons for their exit. This is where good leaver and bad leaver clauses come into play, determining not only the exit itself but also the price at which the departing shareholder will transfer their shares.

Good Leaver

A good leaver is a shareholder who leaves the company for justified reasons, such as retirement, disability, death, unfair dismissal, or completion of a previously agreed minimum vesting period.

In such cases, the shareholder is deemed to have acted loyally and is therefore entitled to transfer their shares at market value or under favorable conditions.

Bad Leaver

Conversely, a bad leaver is a shareholder whose departure stems from circumstances detrimental to the company, such as dismissal for cause, serious breach of the bylaws or shareholders’ agreement, or disloyal conduct. In these cases, the transfer is usually subject to penalties, at nominal value, or with significant discounts.

Therefore, having a detailed definition tailored to the specific business reality is essential. Vague drafting may lead to significant disputes regarding share valuation. The same effect may result from a lack of coordination between shareholders’ agreements and the company’s bylaws, leading to parallel or contradictory regulations, as well as from failing to periodically review these clauses to adapt them to the company’s evolution.

As with shareholders’ agreements and family agreements, we recommend establishing these clauses at the outset or during the early years of the company to prevent premature departures and future conflicts. Drag-along, tag-along, good leaver, and bad leaver clauses are not mere legal formalities but strategic tools that directly impact the ability to attract investment, the feasibility of a future sale, and the stability of the startup.

If you are creating a startup, bringing in investors, or reviewing your corporate structure, obtaining legal advice is the best way to protect your company’s value and ensure its growth. At Navarro Llima Abogados, we have over 20 years of experience effectively helping our clients establish a secure legal framework for their businesses. We invite you to contact us at info@navarrollimaabogados.com