Understanding “Come Along” and “Tag Along” Rights in Private Companies

Shareholders Agreements Explained

When setting up or exiting a private company in South Africa, shareholders must think beyond profit projections and ownership percentages. One of the key areas often overlooked is the exit mechanism—what happens if a shareholder wants to sell, or if another shareholder does? Two contractual protections, “come along” and “tag along” rights, should be negotiated and embedded into your company structure from day one. These are not covered by default under the Companies Act No. 71 of 2008 ("the Act"), so if they are not recorded in writing, they won’t be enforceable.

Come Along vs Tag Along- What do these terms mean?

Tag along rights are designed to protect minority shareholders. If a majority shareholder negotiates the sale of their shares to a third party, tag along rights allow the minority shareholders to insist that their shares are also sold to the same purchaser, on the same terms. This prevents a situation where the minority is left behind with a new controlling shareholder who may not act in their interests. If you own 30% and the holder of 70% is cashing out, you can exercise your tag along right and exit too, at the same price per share. Without it, you may be stuck with a buyer you never chose.

Come along rights, on the other hand, are tools for majority shareholders. If they find a purchaser willing to buy 100% of the business, they can compel the minority to sell as well, even if the minority objects. These rights are useful to prevent a small shareholder from holding up a full acquisition. Of course, for these to be enforceable, they must be contractually agreed upon—typically in either the Memorandum of Incorporation ("MOI") or a Shareholders' Agreement ("SHA").

It’s critical to understand the difference in status between these two documents. The SHA governs the relationship between shareholders, while the MOI governs the company’s internal rules and dealings with third parties. In terms of section 15(7) of the Act, the MOI trumps the SHA if there is a conflict. This means it’s best practice to include core shareholder rights and restrictions in both documents, but if you want them to bind future shareholders or third parties, they must appear in the MOI.

What about deadlock?

Deadlock is another issue that deserves serious attention, particularly in 50/50 ownership structures or where there's no clear controlling majority. A deadlock can occur where shareholders or directors cannot agree on fundamental issues, such as whether to sell the business, raise capital, or change strategy. If not resolved, this can bring the company to a standstill.

There are several contractual solutions that can be included in the MOI or SHA to address deadlock. These include the appointment of an independent mediator or arbitrator, a rotating casting vote, buy-sell provisions (often called "shotgun clauses"), or forced sale mechanisms where one party must buy out the other. Without such clauses, parties are left to common law or statutory remedies, which may be more costly and uncertain.

Under the Companies Act No. 71 of 2008, shareholders have access to section 163, which allows a shareholder to apply to court for relief if they feel that they are being oppressed, unfairly prejudiced, or that the business is being conducted in a manner that unfairly disregards their interests. This is a powerful tool in deadlock or abuse situations. The court may order the other shareholders to buy out the aggrieved party’s shares, change the governance structure, or even appoint a director.

In extreme cases where relationships have completely broken down, a shareholder may apply to wind up the company on the basis that it is just and equitable to do so, in terms of section 81(1)(d)(iii) of the Act. This is a last resort, but sometimes the only way out. In parallel, common law principles around good faith, fiduciary duties, and breach of contract still apply. Directors and shareholders who act in bad faith or contrary to the company’s best interests may be held personally liable.

The Take-Away

For shareholders wanting to start a company, the key takeaway is this: invest time upfront in a well-drafted SHA and MOI. These documents should not be templates copied off the internet or rushed through for CIPC compliance. They should reflect the specific needs, personalities, and business plans of the parties involved. Share transfer restrictions, pre-emptive rights, voting thresholds, dispute resolution, dividend policies, and exit strategies must all be considered together.

For shareholders wanting to exit, it's vital to check if come along or tag along rights exist and what they say. If you're a minority shareholder, tag along rights can help ensure you are not left behind. If you're a majority shareholder, come along rights can enable you to exit smoothly and extract maximum value for your shares. If no such rights exist, negotiation becomes your only option—backed by your contractual and statutory rights.

Shareholder disputes are one of the most common and disruptive forms of litigation for small and medium businesses in South Africa. Yet they are also among the most preventable. With clear, enforceable, and fair agreements in place, many of these disputes can be avoided altogether.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. You should consult a qualified attorney for advice specific to your situation.

If you’re starting a business or thinking of selling your shares in a private company, Spence Attorneys can help you structure your agreements, protect your interests, and navigate any disputes. We draft shareholder agreements, advise on exits and acquisitions, and act in complex shareholder litigation. Reach out to us today - professional, reliable, and here for you. Email: info@spencelaw.co.za