A tag-along right is a means of usually used to protect a minority shareholder. It works in such a way that if the majority shareholder sells then the minority shareholder has the right to join the transaction and sell its part of the company’s equity. Tag-alongs therefore effectively oblige the majority shareholder to include the shareholding of the minority holder in the negotiations in order to facilitate the exercise of the tag-along right. A tag-along right contains no obligation on the minority shareholder to sell.
A drag-along right, by contrast, is designed to assist a majority shareholder who, commercially may only be able to find a buyer for the entire capital of the company. This right enables the majority shareholder to force the minority shareholder of the company to join the sale where there is a sell down of the shares to a third party.
There is a question as to how tag-along and drag-along rights can be drafted under Hungarian law and generally which legal instrument can best accommodate the requirements of these rights. It appears that an option structure is the best method. Under an option arrangement, each shareholder would grant a “put” and a “call” option to the other – the put being to facilitate the tag along and the call to facilitate the drag along. As the options are granted to each shareholder rather than a third party, pursuant to this structure, the shareholder who is buying under the option arrangement would have to take the shares of the co-shareholder onto its balance sheet before on-selling to the third party offeror. In view of this the solution may not be attractive from a commercial point of view. However, this adverse effect may be eliminated by the application of clause 373.4 of the Hungarian Civil Code which makes it possible to appoint a third party, in this case the offeror, who exercises the right in lieu of the original beneficiary.
Another problem with options is that their maximum exercise period under Hungarian law is five years. Although it may well be that this period is sufficient for the purposes of a short term investment in a company, it does introduce a great degree of uncertainty. A solution to this is for the effective date of the starting of the option period (that is the five years) is to be conditional upon a trigger event, such as the offer from a third party regarding the shares in the company.
Other alternative solutions to structure the tag and drag-along rights may be to structure them as an agreement to agree regarding the sale and the purchase of the shares at a later date conditional upon the occurrence of a trigger event (which, again, can be the offer from a third party). It may be a problem that the parties, as at the date of their agreement to agree will not know who the prospective purchaser will be and so cannot address their undertaking to this third party. It is not clear how a Hungarian court would view this issue.
Pricing
Whether or not the tag-along and drag-along rights are structured as an potion or an agreement to agree, the issue of the price of the shares to be sold remains problematic. The law requires the parties to agree on the price upon signing the agreement. If the price is not expressed in numeric terms, then a firm formula on the basis of which the price is calculable should be included. The problem with the tag-along and drag-along rights is that the actual price will be dependent upon the third party offer and it appears doubtful whether a court, in the case of a debate, would agree with a price determined by reference to such a third party offer. The risk is that an option agreement could be invalidated and an agreement to agree could be rescinded by the court.
These thoughts are to demonstrate that even issues that appear on their face relatively simple, in fact, when thought carefully, require a lot of legal creativity to solve.
