Anonymised, illustrative composite. A federal corporation, a sponsor selling in year four, a founder holding 20% with no CBCA dissent right to fall back on, and a drag-along clause that had to do all the work by itself.
At a glance
A technology-enabled services company was incorporated federally and took its first institutional investment four years before this deal, with a private equity sponsor acquiring 80% of the shares and the founder retaining 20%. The investment closed under a unanimous shareholders agreement that included a standard drag-along clause: if shareholders holding a majority of the shares agreed to sell 100% of the company to a third party, the remaining shareholders could be compelled to sell on the same terms. In year four, the sponsor ran a sale process and agreed to sell the entire company to a strategic acquirer for consideration of 70% cash and 30% shares of the acquirer, a private company the founder had no prior relationship with and no ability to diligence to the same depth as his own company.
The founder had no vote on the transaction — the sponsor’s 80% was more than enough to approve the sale under the shareholders agreement, and the drag-along clause did not require the founder’s consent, only his cooperation. He objected on three grounds: he was being forced to accept non-cash consideration in a company he had not chosen and could not easily value or later sell; he was being required to give representations and warranties and join a joint indemnity to the acquirer, exposing his own personal proceeds to claims arising from conduct across the whole company, not just his own role; and he was doing all of this a second time, having already accepted dilution and governance terms he had not fully controlled when the sponsor first invested.
The founder’s counsel first checked whether the CBCA’s dissent-and-appraisal right could be used to force a straight cash buyout instead of following the sponsor into the deal. It could not. Section 190(1) is an exhaustive list of the corporate actions that give a shareholder a right to dissent, and it is worth reading in full because what it does not include is the point: “a holder of shares of any class of a corporation may dissent if the corporation is subject to an order under paragraph 192(4)(d) that affects the holder or if the corporation resolves to (a) amend its articles … (b) amend its articles … (c) amalgamate otherwise than under section 184; (d) be continued under section 188; (e) sell, lease or exchange all or substantially all its property under subsection 189(3); or (f) carry out a going-private transaction or a squeeze-out transaction.” Every trigger on that list is something the corporation itself resolves to do — amend its articles, amalgamate, sell its own assets, go private. A drag-along sale is none of those things. It is the sponsor and the acquirer buying and selling shares the sponsor already owns, and compelling the founder to sell his own shares under a private contract he signed four years earlier. The corporation passes no resolution at all; there is nothing for the founder to dissent from, because s.190 was never triggered in the first place.
The founder’s 20% of a deal valued at $38,000,000 came to $7,600,000, of which 30% — $2,280,000 — would be paid in acquirer stock rather than cash. The joint representation and warranty indemnity exposed each shareholder to claims up to 15% of their own proceeds, or $1,140,000 for the founder, for conduct across a business he had not run day-to-day for two years. None of those numbers were set by statute; every one of them was set by what the drag-along clause happened to say, or fail to say, four years earlier.
The founder was compelled to sell. His drag-along clause, as drafted, did contain two protections that mattered: it required that dragged shareholders receive the same form and mix of consideration as the dragging shareholders (so the sponsor could not cash out while forcing the founder into stock alone), and it capped the founder’s individual indemnity exposure at his own pro rata share of the total cap, several-not-joint. Those two sentences, negotiated at the original investment and never revisited, were the entire difference between a manageable second exit and an open-ended one.
A drag-along clause silent on consideration mix can be read to let the majority accept an all-stock or mostly-stock deal and force the minority into it on identical terms — leaving a minority holder who needed liquidity holding illiquid paper in a company he never chose. A drag-along silent on indemnity allocation typically defaults to joint and several liability for the whole representation package, which would have exposed the founder’s full $7,600,000 to claims arising from conduct he had no part in, rather than the $1,140,000 his own several cap actually produced.
The tell was that these protections existed at all — because in most first-round investment documents, drag-along clauses are drafted entirely from the majority investor’s perspective and give the minority nothing beyond the bare compulsion to sell. Here, the founder’s counsel at the original financing had negotiated the consideration-mix and several-liability language specifically because no statute would step in later to do it for him. Four years on, that foresight was the whole of his protection.
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