Drag Along and Tag Along Rights were introduced into Zimbabwean Company Law through the enactment of the Companies and Other Business Entities Act (the COBE Act). This development brought about the protection of both majority and minority shareholders depending on which mechanism is triggered. These rights are important forms of investment realization.
It suffices to mention that a person who alone or together with the person’s associate or associates has acquired a control block of shares of a public company must on the date of acquisition give notice thereof to shareholders in writing and within sixty days of such notice must give further notice in writing to all of the remaining company’s shareholders offering to acquire the company’s ordinary shares belonging to them at a price not less than the weighted average price at which he or she acquired the company’s shares comprising the control block. If the offer has been accepted by the holders of at least ninety per centum of the target shares, then drag along and tag along rights come into play.
DRAG ALONG RIGHTS
The Drag Along provision essentially protects the interests of the majority shareholders. Drag along rights give majority shareholders the right to squeeze out the minority in cases where they have sold ninety per centum of the target share. These rights are provided for in section 238 of the COBE Act. The Act stipulates that if an offer to acquire remaining shares has been accepted by holders of at least ninety per centum (90%) of the target shares, the offer by the offeror and its associate or associates; the offeror may within sixty days thereafter notify the holders of the remaining target shares that the offer has been accepted to that extent and the offeror wishes to acquire all remaining target shares and after giving such notice the offeror shall be entitled and bound to acquire all such remaining shares on the same terms that applied to shares whose holders accepted the original offer. The advantage of invoking drag along rights is that it increases the marketability of the investment business by delivering a target company with no minority interests.
TAG ALONG RIGHTS
These rights are at the disposal of minority shareholders. The purpose of the Tag Along provision is to ensure that minority shareholders are not left behind in the event that a majority shareholder or shareholders decide to exit a company. Tag along rights are provided for in section 239 of the COBE Act. Section 239(1) states that, if an offer to acquire remaining shares has resulted in the offeror’s acquisition of at least ninety per centum of the target shares, the offeror must inform the holders in writing within thirty days after acquiring them that the offer has resulted in the acquisition of the target shares to that extent. After the notice is received, the offeror is bound to purchase all of the minority shareholders’ shares. The same terms that applied to shares of holders that accepted the original offer are to apply in the acquisition of the target shares. The offeror acquires the shares at the same price as the majority shareholders which provides liquidity and a fair exit route for minor shareholders.
In order for drag along rights and tag along rights to be enforced, it is not necessary for the rights to be spelt out in the shareholder’s agreement. If the requirements provided for under the COBE Act are met, then cadit questio, the rights can be rightfully enforced at law. Generally, the question of enforceability arises in cases of non-compliance. It is fortunate that the COBE Act tackles the same and the Zimbabwean courts have had occasion to deal with such cases.
If a majority shareholder seeks to invoke drag along rights and an offer to acquire such remaining shares has not been accepted by the offerees, the majority shareholder may apply to the Magistrates Court for an order authorising the offeror to give again the notice and an order declaring that the offeror shall be entitled and bound to acquire all such remaining shares on the same terms that applied to shares whose holders accepted the original offer.
In the case of enforcing tag along rights, the COBE Act explicitly states that any person who fails to comply with the same shall be subject to a civil penalty. The imposition of a civil penalty acts as a deterrence to offerors from bullying minority shareholders.