Conventionally, drag-along rights are used to facilitate the sale of companies. With conventional drag-along provisions, shareholders agree in advance that they will vote in favor of a sale transaction that is approved by a certain identified sub-group of shareholders (e.g. a majority in ownership of investors and founders). In the impact investing context, we have seen a similar concept applied with respect to the decision to convert to an alternative entity, such as a benefit corporation.
They are most often applied when management may be inclined to convert to a an alternative entity, but they fear the alternative entity may discourage investment.
By deferring the decision until after investment, investors and the newly constituted board will have the ability to contribute to the discussion about the merits of conversion. The drag-along right ensures that all shareholders will then vote in favor of conversion, if the identified sub-group(s) approves it.
- The parties will need to agree on what sub-group approval is required, and the percentage favorable vote within each sub-group (e.g. majority or higher).
Sample language: If the [insert approvals required, i.e. board and/or certain classes of shareholders as well as the % vote required], approve conversion of the Company into a [benefit corporation] OR [public benefit corporation] OR [social purpose corporation], all shareholders shall agree to vote their shares in favor of whatever amendments are necessary to the [Certificate] OR [Articles] of Incorporation and other corporate documents to implement the conversion. The shareholders shall also agree to waive any dissenters’ rights or rights of appraisal in connection the conversion