M&A: Lock-Up, Tag Along and Drag Along Compared

In the context of Merger & Acquisition (M&A) transactions, it is common to encounter clauses such as “Lock-Up Period,” “Tag Along,” and “Drag Along,” which are essential for understanding the dynamics that unfold in post-acquisition management. These contractual tools are widely used by investors to protect the value and stability of the assets involved, with effects extending even beyond the main transaction, in line with the initial investment objectives.

In this article, we will analyze in detail the function and application of each clause, supported by a real case that highlights its strategic significance.

First, let us focus on the Lock-Up Period clause: its purpose is to bind specific parties—typically major shareholders, founders, or managers—from transferring (i.e., selling) their shares in a company for a specified period following an extraordinary transaction, such as a merger or acquisition.
This restriction serves a dual purpose: on one hand, it ensures stability in the shareholder structure, the partners, and the stakes or shares, while on the other, it guarantees continuity in corporate governance, which is especially critical during the post-deal transition phase, ensuring commitment to the values to which the parties have agreed. The lock-up period, which can range from a few months to several years depending on the type of transaction and the nature of the parties involved, prevents abrupt changes in the company’s structure, thereby protecting investor confidence and corporate value.
In essence, the Lock-Up Period represents a long-term commitment to maintaining the company’s control and organization, thus consolidating the credibility and perceived solidity in the market.

 From a legal perspective, the clause can be included in the shareholders’ agreements as a pact between shareholders or directly in the company’s bylaws, giving it legal significance for all participants in the company.

Real Case: Kering’s Acquisition of Valentino

A notable example is the 2023 acquisition of a 30% stake in the Valentino brand by the French group Kering, through the purchase of shares held by the Mayhoola fund, which still retains the remaining 70%.

The sale agreement explicitly stipulated a 5-year lock-up period for the original shareholders and managers, with the aim of preserving the brand’s identity, internal know-how, and ensuring management continuity. During this period, any transfer of shares will require the consent of the other parties, demonstrating the binding nature of the clause[1].

Tag Along and Drag Along: Tools for Shareholder Balance

Alongside the Lock-Up, M&A transactions often include Tag Along and Drag Along clauses, which regulate the joint sale of shares between majority and minority shareholders, ensuring consistency and fairness in the exit or transfer of ownership.

Specifically, the Tag Along clause, also known as the “right of co-sale,” protects minority shareholders by guaranteeing them the right to participate in the sale of shares on the same terms offered to the majority. This prevents minority shareholders from being excluded from strategic divestment transactions and offers them a fair liquidity opportunity.
On the other hand, the Drag Along clause gives majority shareholders the power to compel minority shareholders to sell their shares if a buyout offer for the entire company materializes. The purpose of this provision is to facilitate the full sale of the company, making it more attractive to potential buyers interested in acquiring full control.

These clauses are also typically included in shareholders’ agreements or company bylaws, depending on the parties’ preferences.

Conclusion

The Lock-Up Period, Tag Along, and Drag Along clauses are essential tools for protecting investors’ interests in M&A transactions. When properly structured, they ensure stability and continuity in corporate governance, protect minority shareholders, enhance the transparency of asset disposals, and facilitate shared and orderly exit operations.

The adoption of these tools proves to be appropriate and often indispensable, especially in an economic landscape where corporate credibility and consistent management are cornerstone factors for the success of the transaction.

[1] Valentino, Qatar e Kering cercano un compratore: il nodo delle clausole contrattuali | Corriere.it

The above content is provided for informational purposes only. The provision of this article does not create an attorney-client relationship between D’Andrea & Partners and the reader and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel.