One such company was OfferDrag Ltd., whose drag had been drafted on the basis that the potential buyer would first have to make an offer to all of OfferDrag’s shareholders – if the majority accepted the offer, the buyer could drag the minority along with them. Due to the makeup of OfferDrag’s shareholder base, making that
offer would meant engaging an investment bank and publishing a detailed offer document. That sort of process is only suitable for the largest acquisitions, or public company takeovers.
Just as if it had no drag at all, OfferDrag’s articles had to be changed. This requires a seventy-five per cent. supermajority at a general meeting, which can be difficult to achieve in itself, and will usually entail a 14 day notice period to call the meeting. Adding or widening a drag right can be particularly problematic - in theory any shareholder who doesn’t vote in favour of the new drag could argue that the changes were unfair to them, or that their shares were forcibly taken from them. The potential for such a claim may make a buyer nervous.
In the case of OfferDrag, the articles were successfully changed – the drag itself remained unchanged, and therefore each shareholder was no worse off, but the high administrative hurdle of making a general offer to all shareholders was removed and so the transaction was able to go ahead.
FixedPrice Ltd.
In other circumstances, an inability to drag can be caused by something entirely outside the company’s control. When an investor put up the whole of FixedPrice Ltd.’s C round financing, they wanted the benefit of a drag. Management, as the majority shareholder group, was less keen on giving a substantial minority investor the ability to drag them into a sale.
A compromise was reached – the investor could have the benefit of a drag right, but only if the per-share price in the sale exceeded a fixed amount. The price was high enough that management would be happy to sell if it could be achieved, and the investor had the comfort that when the business hit its projected figures they would be able to sell within three or four years.
The rest is probably obvious by now – the FixedPrice C round took place before 2008. FixedPrice’s results have been some way behind their projections, and the price multiples at which businesses in their industry sell have dropped such that FixedPrice would need to outperform its projections by some way in order to hit the per-share valuation set in the drag. Again, the drag has become effectively useless.
The problem here was the use of a fixed price in the drag, which immediately made the drag subject to many variable
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