Drag-Along Clauses - Notes from an Italian Case

Drag-along-clauses: May the General Meeting pass a Drag-Along Clause notwithstanding an Objection by Minority Shareholders?

A drag along right gives the investing shareholder the right to force the other investor(s) to exit should the investing shareholder exit, on the same price and terms. Drag-along rights are fairly standard terms in a stock purchase agreement. Drag-along rights typically terminate upon an  initial public  offering. 

Longer lasting drag-along rights also assure that if the majority shareholder sells his stake, minority holders are forced to join the deal. This right facilitates the majority shareholder in selling his stake: i.e. the purchaser becoming sole shareholder has no reason to share business decisions with the minority shareholders or to be under their control powers.

Drag-along clauses are often combined with pre-emption rights. The combination of these two rules together creates a “Russian roulette” kind clause, i.e. a deadlock-breaking provision. In case a trigger event occurs, any shareholder is entitled to pull the trigger by making an offer: either she acquires (or lets a third party acquire) all of the outstanding shares, or the other shareholder declares her intention to acquire at the same price and conditions.

A drag-along clause may be inserted in by-laws or shareholders’ agreements.

A recent decision ofMilan Civil Courtstates that a drag-along clause, albeit combined with the pre-emption right for the potentially “dragged shareholder”, may not be passed by a general meeting resolution by majority vote in case some shareholders object. This decision is to be favourably considered, although some remarks are necessary.

Under Italian law, in case a resolution affects the shareholders’ ability to sell their shares, withdrawal rights are granted (art. 2437 Italian Civil Code). It is unclear whether drag-along clauses affect the shareholders’ ability to sell their shares in such a way that objecting shareholders have a right to withdraw. TheCivil CourtinMilanholds that such a rule does not apply; hence, resolutions may not be passed on a majority vote basis.

All general meetings’ resolutions are to be taken by majority vote. No resolution in a limited company having a share capital requires unanimity; unanimity rule never applies. Rather, art. 39 of EU Second Company Law Directive (dir. 77/91/CEE) permits redeemable shares, provided that «(a) redemption must be authorized by the company’s statutes or instrument of incorporation before the redeemable shares are subscribed for». Drag-along clauses grant redemption rights in favour of the majority shareholder or the purchaser of her shares. Hence, drag-along rights affecting the outstanding shares might be included in the company's statutes or instrument of incorporation (by a majority vote), but they may not affect the outstanding shares, unless each and every shareholder agrees.

The need for an individual agreement does not lead to the conclusion that introduction of a drag-along clause by majority vote is void; rather it is ineffective until all shareholders agree. If the resolution is objected by some shareholders, such a resolution, although not void, is definitely ineffective. A court may not give an order to include such a resolution in the company’s registrar.

Nicola de Luca, Assistant Professor, Second University of Naples, Lawyer at Bussoletti Nuzzo & Associati Law Firm, Rome, nicola.deluca@bnassociati.it; +39 06 47825044; www.bnassociati.it