What is tag-along right upon capital exit? Legal regulations and effective application

In the context of increasingly common investment activities and share transfers, the tag-along right upon capital exit has become an important legal mechanism for protecting shareholders’ interests, particularly those of minority shareholders. Such a right ensures that when a major shareholder intends to sell its capital contribution, the remaining shareholders are given the opportunity to participate in the sale, thereby maintaining fairness and balancing interests within the company.

I. Current situation relating to tag-along rights upon capital exit

In practice, within investment and corporate governance activities, tag-along rights upon capital exit have not received adequate attention, especially in joint stock companies and startups. Many shareholders’ agreements and company charters do not clearly provide for such a mechanism, resulting in disadvantages for minority shareholders when major shareholders transfer their capital contributions.

Furthermore, numerous disputes have arisen as the parties do not share a consistent understanding regarding the conditions, scope, and methods for exercising tag-along rights upon capital exit. The absence of specific regulations or the drafting of vague contractual provisions often leaves the rights and interests of the parties, particularly minority shareholders, insufficiently protected.

In addition, current laws do not contain separate or detailed provisions governing tag-along rights upon capital exit, as such rights are primarily based on agreements between the parties. 

II. Concept of tag-along rights upon capital exit

1. What is a tag-along right upon capital exit?

A tag-along right upon capital exit is a right of minority shareholders to participate in the sale of their capital contributions or shares together with a major shareholder when such shareholder transfers its interest to a third party. Accordingly, when a major shareholder exits its investment, minority shareholders are entitled to require the purchaser to acquire their shares under the same terms and conditions, including the same price and transaction method.

Such a right is commonly stipulated in shareholders’ agreements or company charters in order to protect minority shareholders’ interests and prevent them from being “left behind” when changes occur in the company’s ownership structure.

2. What is the purpose of tag-along rights upon capital exit in shareholders’ agreements?

Tag-along rights upon capital exit are established to protect the lawful rights and interests of shareholders, especially minority shareholders, in cases where major shareholders transfer their capital contributions. First and foremost, such a mechanism helps ensure fairness among shareholders by allowing all shareholders the opportunity to exit their investment under the same pricing and transactional conditions.

In addition, such a right helps reduce risks for minority shareholders when changes occur in the ownership structure or when new investors are introduced, thereby preventing them from becoming dependent upon or disadvantaged within the enterprise. At the same time, including tag-along rights in shareholders’ agreements also contributes to enhancing transparency and stability in corporate governance while minimizing potential disputes.

3. Who is entitled to request the exercise of tag-along rights upon capital exit?

The parties entitled to request the exercise of tag-along rights upon capital exit are generally minority shareholders or shareholders without controlling interests in the enterprise. These are the parties most likely to be adversely affected when a major shareholder transfers its capital contribution to a third party.

Such a right arises where the company charter or shareholders’ agreement provides that minority shareholders are entitled to require the transferee to purchase their shares under the same terms and conditions applicable to the transferring shareholder.

Furthermore, the scope and specific parties entitled to benefit from tag-along rights upon capital exit may vary depending on the agreements between the parties, including both individual and institutional shareholders of the company. Therefore, identifying the parties entitled to such rights must be based on the specific provisions of each relevant contract or agreement.

III. Legal regulations relating to tag-along rights upon capital exit

1. In which circumstances do tag-along rights upon capital exit arise?

Tag-along rights are not directly regulated under the Law on Enterprise 2020 (as amended and supplemented in 2025) but arise on the basis of agreements among shareholders, provided that such agreements comply with regulations governing share transfers.

Specifically, under Clause 1 Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred except where restricted by law or the company charter. Based on such a principle, shareholders may agree to incorporate tag-along rights in order to protect minority shareholders’ interests. Such rights commonly arise in the following circumstances:

• When a major shareholder or owner transfers shares to a third party: A transfer conducted under Article 127 may alter the company’s ownership structure; thus, minority shareholders may request to sell their shares under the same terms and price if such right has been agreed upon.
• When provided for in the company charter or shareholders’ agreement: Under Clause 1, Article 127, restrictions or adjustments relating to share transfers may be stipulated in the company charter, thereby forming the legal basis for the emergence of tag-along rights.
• When the transfer transaction may adversely affect minority shareholders’ interests: For example, in cases involving changes in corporate control or changes in strategic investors. In such circumstances, tag-along rights may be triggered if previously agreed upon.

2. What conditions must be satisfied for tag-along rights upon capital exit to have legal validity?

Tag-along rights only have legal validity when all conditions relating to parties, content, and form of agreement are fully satisfied, provided that such agreements do not violate enterprise laws. Specifically:

- First, the right must be lawfully recorded in a binding agreement

Tag-along rights must be clearly stipulated in the company charter or shareholders’ agreement. It constitutes the basis for rights and obligations among the parties under the principle of freedom of agreement.

- Second, the content must not violate the law

Pursuant to Clause 1 Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred except where restricted by law or the company charter. Therefore, tag-along provisions are only lawful where they do not deprive shareholders of their lawful transfer rights but merely regulate the manner in which such rights are exercised.

- Third, the provisions must be clear and specific

The agreement should clearly define:

• Circumstances leading to tag-along rights (for example, transfer by a major shareholder);
• Percentage of shares entitled to participate in the sale;
• Sale price and transaction conditions;
• Time limit for exercising the right.

- Fourth, the agreement must be approved and binding upon relevant parties

Where stipulated in the company charter, the provision must be validly approved in accordance with corporate procedures; where stipulated in a shareholders’ agreement, it must be signed by all relevant parties.

- Fifth, compliance with share transfer procedures

The exercise of tag-along rights must comply with the share transfer procedures prescribed under Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), including:

• Execution of the share transfer agreement;

• Recording the transfer in the shareholder register;

• Completion of notification procedures to the company and relevant shareholders.

3. How is the time limit for exercising tag-along rights upon capital exit determined?

Current enterprise laws do not specifically regulate the time limit for exercising tag-along rights; thus, such a matter is mainly determined based on agreements among shareholders.

In practice, the time is usually specified in the company charter or shareholders’ agreement and is linked to the time at which the transferring shareholder notifies the intended transaction. Typically, such a time is determined within a reasonable period (for example, from 10 to 30 days) in order to provide minority shareholders with sufficient time to consider and decide whether to participate in the transaction.

The determination of such time limit must also ensure that it does not hinder shareholders’ right to freely transfer shares under Clause 1 Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), while still adequately protecting the legitimate interests of minority shareholders.

In cases where no specific agreement exists, the time limit for exercising tag-along rights shall be determined based on the principles of good faith, reasonableness, and prevailing transaction practices, or through supplementary agreements made by the parties at the time the transfer arises.

4. How are violations of obligations relating to tag-along rights upon capital exit handled?

Pursuant to the Civil Code 2015 and the Law on Enterprise 2020 (as amended and supplemented in 2025), if a party breaches obligations relating to tag-along rights upon capital exit, liability shall be determined based on the parties’ agreements and general civil liability provisions. Specifically:

• Compulsory performance of agreed obligations: Pursuant to Articles 351 and 352 of the Civil Code 2015, the breaching party must continue performing its obligations as agreed (for example, allowing minority shareholders to participate in the sale of shares).
• Compensation for damages arising from the breach: Under Article 360 of the Civil Code 2015, if the breach causes actual damages (such as loss of opportunity to sell shares or price-related losses), the breaching party must fully compensate for such damages.
• Contractual sanctions (if agreed upon): Pursuant to Article 418 of the Civil Code 2015, the parties may agree upon penalty clauses applicable where tag-along rights are not properly performed.
• Cancellation or termination of the relevant transfer transaction: Under Article 423 of the Civil Code 2015, where the breach is serious, the aggrieved party may request cancellation of the contract or share transfer transaction.
• Dispute resolution: Disputes may be resolved through negotiation, arbitration, or court proceedings in accordance with the law and the parties’ agreements.

IV. Questions relating to tag-along rights upon capital exit

1. Are minority shareholders required to exercise tag-along rights upon capital exit?

Minority shareholders are not obligated to exercise tag-along rights upon capital exit. By nature, tag-along rights are optional rights intended to protect minority shareholders by allowing them to participate in the sale of shares together with major shareholders when transactions with third parties occur. Therefore, minority shareholders may decide whether or not to exercise such rights depending on their own interests.

Pursuant to Clause 1 Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred; therefore, participation in a transfer transaction remains at the shareholder’s discretion. Tag-along rights merely serve as a protective mechanism and do not create a mandatory obligation.

However, where the company charter or shareholders’ agreement provides that tag-along rights are accompanied by mandatory obligations (in certain special circumstances), shareholders must comply with such agreements.

2. Do tag-along rights upon capital exit automatically arise if they are not expressly provided for in the company charter?

Tag-along rights do not automatically arise under the law if they are not expressly stipulated in the company charter or agreements among shareholders.

Pursuant to Clause 1 Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred except where restricted by law or the company charter. Accordingly, special rights such as tag-along rights are only legally enforceable when clearly agreed upon and lawfully recorded by the parties.

In the absence of specific provisions, minority shareholders do not have the right to require participation in the sale of shares together with major shareholders, even where a transfer transaction results in changes to the ownership structure. 

3. How are disputes relating to tag-along rights upon capital exit commonly resolved?

Disputes relating to tag-along rights are first resolved based on the company charter or shareholders’ agreement, as these documents constitute the basis for determining the rights and obligations of the parties.

Where the parties cannot independently resolve disputes relating to tag-along rights upon capital exit, they may choose appropriate dispute resolution methods. Reference to Article 317 of the Commercial Law 2005 is merely indicative of available dispute resolution methods, including negotiation, mediation, arbitration, or court proceedings. The selected method depends on the agreement between the parties or provisions contained in the relevant contract.

4. Do tag-along rights upon capital exit apply to internal transfers among existing shareholders?

Tag-along rights are designed to protect minority shareholders where shares are transferred to third parties, potentially resulting in changes to the ownership structure or control of the company. Since shares may generally be freely transferred, transfers among existing shareholders do not, in principle, trigger tag-along rights unless otherwise agreed.

However, where the company charter or shareholders’ agreement expressly provides that tag-along rights also apply to internal transfers, the parties remain obligated to comply with such agreements.

Therefore, tag-along rights do not automatically apply to internal transfers among existing shareholders unless specifically provided for in the company charter or shareholders’ agreement.

5. Can tag-along rights upon capital exit be transferred to third parties?

The transferability of tag-along rights is not directly regulated by law but instead depends on agreements among shareholders contained in the company charter or shareholders’ agreement.

In principle, tag-along rights are rights attached to shareholder status and arise from share ownership. Therefore, such rights cannot be independently transferred to third parties unless expressly permitted by agreement.

Shares may generally be freely transferred. Accordingly, in practice, tag-along rights are often transferred together with the shares when shareholders conduct share transfers, provided that no restrictions exist in the parties’ agreements. Where the company charter or shareholders’ agreement expressly permits such transfer, tag-along rights may be transferred to third parties under the agreed conditions.

Thus, tag-along rights are not freely transferable on an independent basis and are generally transferred only together with the shares unless otherwise lawfully agreed.

V. Why should you seek legal advice from NPLaw regarding tag-along rights upon capital exit?

Tag-along rights are contractual mechanisms commonly stipulated in company charters or shareholders’ agreements with complex provisions that can easily give rise to disputes. Therefore, obtaining legal advice is essential to safeguard interests and minimize legal risks.

With a team of lawyers possessing extensive expertise in corporate and investment law, NPLaw assists clients in drafting, reviewing, and optimizing tag-along right provisions in a rigorous and transaction-oriented manner. In addition, the firm’s lawyers help assess legal risks relating to capital exits and ensure that transfer transactions comply with applicable laws and executed agreements.

In the cases of disputes, NPLaw has experience representing clients in negotiations, mediation, arbitration proceedings, and litigation before courts, thereby maximizing the protection of clients’ lawful rights and interests.

Moreover, obtaining legal advice at an early stage also enables enterprises to establish effective mechanisms for controlling share transfers and preventing future disputes.

The above information is provided for reference purposes only. Should you require detailed advice regarding your specific case, please contact NPLaw Firm for immediate consultation.