Last Updated on 22/08/2025 by Damin Murdock
When structuring shareholder arrangements in an Australian company, especially startups and private entities, it’s crucial to protect the interests of both majority and minority shareholders. Two essential mechanisms that help achieve this are pre-emptive rights and drag-along/tag-along clauses. These provisions help prevent unwanted ownership changes and provide clear procedures during a company sale or share transfer.
What Are Pre-Emptive Rights?
Pre-emptive rights, also known as rights of first refusal, give existing shareholders the first opportunity to purchase new shares before the company can offer them to outsiders. The purpose of these rights is to prevent shareholder dilution and to maintain existing ownership percentages.
For example, if a company issues new shares to raise capital, pre-emptive rights ensure that current shareholders can buy a proportional number of those shares. This helps preserve their voting power and influence within the company and a court will generally enforce clear contractual terms and adhere to agreed procedures when issuing new equity.
What Are Drag-Along and Tag-Along Clauses?
Drag-along and tag-along clauses regulate what happens when a shareholder wants to sell their shares to a third party, particularly in the event of a major sale or company acquisition.
Drag-Along Rights allow majority shareholders to compel minority shareholders to sell their shares on the same terms and conditions if a third party is acquiring a controlling interest. This ensures the buyer can acquire 100% of the company without being blocked by small shareholders. It also guarantees that minority shareholders receive the same deal as the majority, preventing them from being left behind or receiving worse terms.
Tag-Along Rights, on the other hand, protect minority shareholders by giving them the right (but not the obligation) to join in on a sale by the majority. If a majority shareholder finds a buyer, tag-along rights allow minority holders to sell their shares on the same terms, ensuring fair treatment.
Why Are These Clauses Important?
These rights and clauses serve several essential purposes in private company governance:
- Preserve Shareholder Interests: Pre-emptive rights stop unwanted dilution and help shareholders retain their control and financial interest in the business.
- Facilitate Clean Exits: Drag-along rights streamline major exits by avoiding resistance from small shareholders who might otherwise block a sale.
- Promote Fairness: Tag-along rights protect minority shareholders from being excluded or offered less favourable terms during sales.
- Reduce Disputes: When clearly drafted, these clauses reduce uncertainty and litigation risks, especially during significant corporate transactions.
- Attract Investors: Institutional and sophisticated investors often require these rights as part of any investment to ensure predictable exit strategies.
Drafting Considerations
These clauses should be tailored to the company’s needs. Key factors to address include:
- Trigger thresholds (e.g., 51% or 75% shareholder approval for drag-along).
- Timing and notice requirements.
- Share valuation methods.
- Consistency with the company constitution and shareholders agreement.
As demonstrated in recent Australian case law, courts give weight to well-drafted clauses, but may also scrutinise procedural fairness. Legal advice is strongly recommended to ensure enforceability and to align with statutory requirements under the Corporations Act 2001 (Cth).
Final Thoughts
Pre-emptive rights and drag-along/tag-along clauses are not just technical details, they’re core governance tools that help maintain control, ensure fairness, and enable smoother transactions. Including them in your shareholders agreement is a proactive step toward safeguarding the company’s long-term success and shareholder alignment.
Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube , LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."
