The establishment of drag-along rights in share transfers not only helps optimize the divestment process but also minimizes risks arising from disagreements among shareholders in mergers, acquisitions, and share transfer transactions.
I. Current situation related to drag-along rights in share transfers
In the context of increasingly developing investment activities and mergers and acquisitions (M&A), drag-along rights in share transfers have become an important mechanism in transactions among shareholders, especially between major shareholders and minority shareholders.
- Firstly, regarding the level of practical application, drag-along rights are commonly stipulated in shareholders’ agreements or company charters, particularly in companies involving investment funds or strategic investors. When a major shareholder finds a buyer, they may require minority shareholders to sell their shares under the same terms and conditions, thereby ensuring that the transfer of the entire company can be implemented smoothly.
- Secondly, regarding the legal basis, current Vietnamese law, specifically the Law on Enterprise 2020, does not directly regulate drag-along rights. However, such a right is indirectly recognized through the principle of freedom of agreement among shareholders under civil and corporate law.
- Thirdly, regarding practical risks and difficulties, the application of drag-along rights may lead to conflicts of interest, especially when minority shareholders are forced to sell their shares under circumstances they do not genuinely desire. In addition, disputes may arise if the drag-along clause does not clearly stipulate the sale price, transfer conditions, or implementation procedures.
Practice requires drag-along clauses to be drafted clearly and strictly in order to minimize disputes.
II. Concept of drag-along rights in share transfers
1. What is a drag-along right in share transfers?
A drag-along right in share transfers is the right of one or a group of shareholders (usually major shareholders) to require other shareholders (usually minority shareholders) to sell their shares to a third party when the major shareholder decides to transfer their shares.
From a practical perspective, such a right is usually designed to enable the buyer to acquire all or a substantial portion of the company’s charter capital without being obstructed by minority shareholders who do not agree to the transfer.
2. Legal nature of drag-along rights in share transfers
In practice, drag-along rights are a form of civil agreement among shareholders, established on the basis of the principle of freedom, voluntariness, and mutual agreement.
It is not a right arising directly from law, but rather a right arising from contract (shareholders’ agreement or company charter). Therefore, the validity and scope of application of drag-along rights depend on the contents agreed upon by the parties.
In addition, drag-along rights also reflect a balance of interests between major shareholders and minority shareholders: While major shareholders have the right to facilitate the transaction, minority shareholders are usually protected through fair pricing clauses or equivalent transfer conditions.
3. Do drag-along rights depend on shareholding ratios?
In principle, the law does not prescribe a specific ownership ratio for drag-along rights to arise. However, in practice, such a right is almost always associated with a certain ownership threshold agreed upon by the parties.
Normally, only when a shareholder or group of shareholders reaches a sufficiently large ownership ratio (for example: 51%, 65%, or 75% of charter capital) may they activate the drag-along clause. The purpose is to ensure that the decision to sell the company reflects the will of the majority and prevents abuse of rights against minority shareholders.
In addition, such a ratio is also related to the ability to pass important corporate resolutions under the Law on Enterprise 2020, thereby providing a practical basis for designing drag-along clauses.
III. Legal regulations related to drag-along rights in share transfers
1. How does current law regulate drag-along rights in share transfers?
The Law on Enterprise 2020 does not contain any provision directly regulating “drag-along rights in share transfers”. However, the indirect legal basis of such a right can be identified through the following provisions:
- Article 127 of the Law on Enterprise 2020: It regulates the right of shareholders to freely transfer shares (except in certain restricted cases).
- Article 115 of the Law on Enterprise 2020: It recognizes shareholders’ rights, including the right to dispose of their shares.
From these provisions, it can be seen that the law allows shareholders to freely agree on share transfer arrangements, including the establishment of a drag-along mechanism in share sale transactions.
2. Must drag-along clauses be included in the company charter?
In practice, drag-along rights are commonly recorded in two forms:
- In the company charter: The clause is binding upon all shareholders.
- In a shareholders’ agreement (SHA): It is only binding upon the signing parties.
Pursuant to Article 24 of the Law on Enterprise 2020, the company charter is the document governing the organization and operation of the company, but its specific contents are determined by the shareholders themselves. Therefore, whether to include drag-along clauses in the charter is a matter of the company’s discretion.
However, if such clauses are only recorded in the shareholders’ agreement and not included in the charter, enforcement may become difficult against shareholders who are not parties to that agreement.
3. In what cases may drag-along rights be declared invalid?
Since drag-along rights are contractual in nature, their validity depends on the conditions for validity of civil transactions under Article 117 of the Civil Code 2015.
Accordingly, drag-along clauses may be declared invalid in the following cases:
- Firstly, violation of prohibitive legal provisions or social ethics. For example, a clause forcing shareholders to sell shares at an unreasonably low price causing serious damage to them.
- Secondly, lack of voluntariness of the parties. If shareholders are coerced or deceived into signing an agreement containing a drag-along clause, the transaction may be invalidated.
- Thirdly, unclear content or impossibility of performance. For example, failure to clearly stipulate the method for determining the sale price or the triggering conditions of the drag-along right may lead to disputes and unenforceability.
- Fourthly, violation of the Law on Enterprise 2020. For instance, a clause restricting share transfers inconsistently with Article 127 or not lawfully recorded.
A drag-along clause may be invalidated if it violates the validity conditions of civil transactions or contradicts corporate law.
4. Does the law prescribe a minimum shareholding threshold for exercising drag-along rights?
Current Vietnamese law does not prescribe a specific minimum shareholding ratio for shareholders to exercise drag-along rights.
However, in practice, parties often establish a certain ownership threshold in shareholders’ agreements (for example: 51%, 65%, or 75%) to ensure that drag-along rights are only exercised when there is agreement from controlling shareholders.
In addition, these thresholds are often connected to the voting thresholds for important resolutions of the General Meeting of Shareholders under Article 148 of the Law on Enterprise 2020 (for example: 65% or 75% of total voting shares).
IV. Questions related to drag-along rights in share transfers
1. Can minority shareholders refuse to comply with drag-along rights?
In principle, if minority shareholders have participated in and agreed to an agreement containing drag-along clauses, they are obliged to perform according to such commitments. Pursuant to Article 3 and Article 385 of the Civil Code 2015, a lawful contract is binding upon the parties.
However, minority shareholders may refuse performance in certain cases such as: the drag-along clause is invalid, the triggering conditions have not been met, or implementation violates the agreement (for example: the sale price does not comply with the agreed principles).
2. Must drag-along rights be approved by the general meeting of shareholders?
The law does not require drag-along rights to be approved by the General Meeting of Shareholders if they only exist as agreements among shareholders.
However, if such clauses are included in the company charter, the adoption or amendment of the charter must comply with Article 148 of the Law on Enterprise 2020 (regarding voting procedures of the General Meeting of Shareholders).
In addition, in certain specific cases such as restricted share transfers or transfers involving preference shares, the transfer must still comply with the company’s general regulations.
3. Must the exercise of drag-along rights comply with share transfer procedures?
Even when implemented under a drag-along mechanism, share transfers must still comply with legal regulations.
Pursuant to Article 127 of the Law on Enterprise 2020, share transfers must be implemented according to the proper procedures, including execution of the transfer agreement, payment, and updating shareholder information in the shareholder register.
In addition, if the company charter imposes transfer restrictions (especially for ordinary shares of founding shareholders during the first three years), such restrictions must still be complied with.
4. Do drag-along rights apply to transfers to a parent company or an affiliate?
The law does not prohibit the application of drag-along rights in internal transfers among affiliated companies.
However, in practice, shareholders’ agreements often clearly stipulate that drag-along rights do not apply to transfers of shares to a parent company, subsidiary, or affiliate in order to maintain flexibility in internal restructuring.
In addition, transfers among related parties must still comply with regulations on related-party transactions under the Law on Enterprise 2020 (for example, Article 167).
V. Why should you seek legal advice from NPLaw regarding drag-along rights in share transfers
Since drag-along rights in share transfers are mainly based on agreements and involve many potential legal risks, seeking support from NPLaw is necessary. With experience in corporate and investment law, our legal team can assist in drafting and reviewing drag-along clauses, ensuring legality and enforceability, as well as advising on effective dispute resolution, thereby helping investors maximize the protection of their interests.
The above information is for reference purposes only. Should you require detailed advice for your specific case, please contact NPLaw for immediate consultation.
