Tag-along and drag-along in a j. s. a.: what the arrangement must contain to be registrable and enforceable

An investor’s term sheet is usually brief on this point: ‘standard drag-along and tag-along’. The shareholder agreement is then often drafted from a foreign precedent that uses the two concepts loosely. For a simple joint-stock company, however, the Commercial Code regulates both mechanisms as ancillary arrangements to a shareholder agreement (Sections 220w to 220y) and lays down what they must contain. If they are to be registered at the central securities depository, further requirements as to form and as to the document for the depository are added. If the documents do not meet those requirements, the depository will not register the right; if the arrangement itself does not meet them, the register may show a right that cannot be exercised at the decisive moment.

The statutory minimum content

The Act defines the tag-along through the obligation of the obliged shareholder:

The right to join in a share transfer corresponds to the obligation of the obliged shareholder, who has undertaken that, on a transfer of its own shares under an agreement, it will at the same time enable the entitled shareholder’s shares to be transferred to the third party on the same terms.

— Section 220x(2) of Act No. 513/1991 Zb. (unofficial English translation)

The arrangement must specify the conditions of exercise, the extent, or the method of determining the extent, to which the entitled shareholder may exercise the right, and the period, or the method of determining it, within which it may be exercised once the conditions are met (Section 220x(3)). For a drag-along, the Act requires the conditions of exercise and the extent, but does not expressly require a period (Section 220y(3)). For practical exercise, however, one should be added there as well.

Several questions follow from these requirements which the text should answer:

• the trigger — which transfer activates the right, for example a transfer of a controlling stake or of any stake held by the obliged shareholder,
• the third party — the Act does not define this more closely; if a drag-along is not to be used to squeeze out the minority through a person connected with the majority, this must be excluded in the agreement,
• the same terms — whether these concern only the price per share, or also the method of payment, deferred consideration, warranties and representations, and to what extent a minority shareholder is liable for representations about the company,
• the procedure — how notice is given, within what period the entitled shareholder must decide and what happens if they remain silent.

The form of the arrangement and the document for the depository

A shareholder agreement in a j. s. a. must bear officially certified signatures and takes effect no earlier than the day of certification (Section 220w(2)). If the rights are to be registered, a stricter rule applies which, from 17 August 2026 (Act No. 29/2026 Coll.), permits an agreement authorised by a lawyer alongside a notarial deed; until then, only a notarial deed would do:

The right to join in a share transfer and the right to require a share transfer may also be agreed as rights arising upon registration under special legislation. In such a case, their creation requires a notarial deed or an agreement authorised by a lawyer.

— Section 220w(3) of Act No. 513/1991 Zb. (unofficial English translation)

A separate document is intended for the depository. The instruction to register must be accompanied by written confirmation of the content of the shareholders’ agreement, stating details of the issuer, the entitled and the obliged shareholder, the shares concerned and the duration of the right, signed by both the entitled and the obliged shareholder with certified signatures (Section 107h(4) of Act No. 566/2001 Coll.). Without it, the depository will not make the entry (Section 107h(5)); for the right to require a share transfer, the Act expressly declares an instruction without such confirmation invalid (Section 107l(5)). If the articles of association restrict the transferability of the shares, the conditions of transferability must also be satisfied in order to create these rights; the company’s consent given on their creation then need not be repeated on their exercise (Section 220p(1) and (2) of the Commercial Code).

Points to bear in mind when drafting the agreement

One right per share. A single share may carry only one right to join in a transfer and one right to require a transfer, although a single right may have several entitled persons (Section 220w(6)). In a further investment round, a new investor will therefore not obtain a separate tag-along over shares that already carry such a right; they may become a further person entitled under the existing right, which means amending both the shareholder agreement and the registration (Section 107h(8)). It is worth drafting the agreement so that it anticipates further entitled persons acceding to it.

Breach on different terms. The statutory claims on breach of a registered tag-along are directed at having the entitled shareholder’s shares acquired by the third party or by the obliged shareholder (Section 220x(5)). The situation in which the entitled shareholder does sell, but on worse terms, is not expressly addressed by the Commercial Code. So that the entitled shareholder is not left dependent on a claim for damages, it is advisable to cover it by a contractual penalty or another agreed mechanism.

Certainty of the future transfer. The rules on agreements to enter into a future contract do not apply to the provisions of a shareholder agreement dealing with these rights (Section 220w(8)). All the essential particulars of the transfer to which the obliged shareholder is committing should therefore be ascertainable from the text.

Exercising a drag-along. A registered drag-along may be exercised by the entitled shareholder even without the cooperation of the obliged shareholder, provided that the purchase price for the obliged shareholder is held in notarial escrow or on an irrevocable letter of credit and satisfaction of the conditions is certified by a notary (Section 220y(4)). The agreement should specify who will arrange and pay for the escrow and from which documents the notary is to assess satisfaction of the conditions. This is examined in detail in what to do when a minority shareholder refuses to sell.

Financing and duration. If the shares are later to be pledged in favour of a bank, the creditor may enforce the security regardless of the registered rights, provided the security was created with the entitled shareholder’s written consent; on a transfer of the shares to the acquirer in the course of enforcement, those rights are extinguished (Section 220w(7)). It is therefore advisable to deal with that consent in the shareholder agreement in advance. The register also records the period for which the right is created, or a statement that it is created for an indefinite period (Section 107g(1)), and the right is extinguished on expiry of that period (Section 220w(9)).

How to proceed

Before signing the term sheet, be clear about which rights each party is to obtain and whether they are to be registered: a registered right also takes effect against successors, but it is public and requires a qualified form. We prepare the design of the structure, the shareholder agreement, the qualified form and the registration through our registered rights in a j. s. a. service. For a conventional joint-stock company or an s. r. o., where registration is not available, shareholder and member agreements is the more suitable service, and for negotiating an entire investment round, investor entry. The basic distinction between the two concepts is set out in what drag-along and tag-along mean, and amendment and cancellation of registered rights is described in how to amend or delete a registered tag-along and drag-along.