[Direct answer]In the Beijing area, the right of first refusal (joint sale right) protects the exit opportunities of minority shareholders: when the controlling shareholders or founders transfer their equity to a third party, minority shareholders have the right to sell their held equity to the third party at the same price and under the same conditions, so as to avoid the situation of "the big shareholders cashing out and leaving, while the small shareholders are left to deal with the mess". It protects three things - the exit opportunity, the transaction price, and the timing of cash realization. It is the opposite of the right of first refusal: the right of first refusal is to force minority shareholders to sell, while the right of first refusal is for minority shareholders to sell along with the controlling shareholders. The two often balance each other in the same agreement.

1. Problem background and typical scenarios

The founders sell their shares to large companies to achieve financial freedom, while minority shareholders hold onto shares that will never find a buyer and continue to wait in vain; or early investors enter at a low price, only to see the founders sell to strategic partners at a high price, leaving early investors watching helplessly as the liquidity opportunities are monopolized. The right of first refusal is designed for this kind of "cashing in on others' efforts".

II. Key points of contention

First, the definition of the triggering subject: which shareholders' transfers trigger the tag-along rights. Second, the exercise ratio and distribution: how to divide the shares in the event of oversubscription. Third, the guarantee of equal conditions: price, payment method, and transaction structure. Fourth, the complementary relationship with the lead-sale rights and preemptive purchase rights.

III. Professional analysis by Henglue Lawyers

Based on Henglu Lawyer's experience in handling investment agreement clauses, the review of the tag-along rights clause should focus on four aspects: 1. **Triggering scope** — Not all transfers trigger the clause: transfers between relatives, internal group restructuring, and employee stock option exercises are typically excluded. The core triggering event is when controlling shareholders or founders transfer control or a significant portion of shares to third parties. The clause must clearly define "third parties" and "change of control". 2. **Proportional allocation** — If all tag-along shareholders exercise their rights but the buyer only requires a portion, the number of shares to be transferred should be allocated according to their ownership percentage or in chronological order. The clause should establish clear rules to avoid preemptive behavior during exercise. 3. **Consistent conditions** — The value of tag-along rights lies in "identical conditions": price no lower than the transferor's, payment method identical, and simultaneous closing. If the transferor increases their own gains (e.g., consulting fees, non-compete compensation) through supplementary agreements with the buyer, this violates the requirement of identical conditions. Such "additional consideration" should be included in the tag-along scope. 4. **Supporting structures** — Combine tag-along rights with put rights: when major shareholders force minority shareholders to sell (put rights), the minority shareholders must guarantee identical conditions (tag-along rights). Link with preemptive rights: exercising preemptive rights by other shareholders may disrupt the integrity of third-party transactions. The agreement should clarify the order of exercise for these three rights. For minority shareholders and early-stage investors, tag-along rights serve as a liquidity safeguard. For founders, clearly defining exclusionary circumstances preserves normal equity operation space.

IV. Practical suggestions and legal basis

First, when signing the contract, all four elements—triggering event, exclusionary circumstances, distribution rules, and additional consideration—must be fully specified. Second, the exercise of rights procedures should include written notifications and response deadlines. Any failure to comply within the deadline shall be deemed as a waiver, which must be explicitly stated. Third, during the transaction, verify whether the transferor has raised their own conditions through supplementary agreements. If such actions are detected, assert that the relevant items should be included in the scope of the transfer. Fourth, establish a fixed order in the agreement regarding the exercise of preemptive rights and priority purchase rights. **Main legal basis**: - Article 522 of the Civil Code of the People's Republic of China (effective January 1, 2021) regarding performance to third parties and Article 577 regarding breach of contract liability; - Article 72 of the Company Law of the People's Republic of China (amended on December 29, 2023, effective July 1, 2024) regarding equity transfer; - Specific application shall be subject to the currently effective provisions.

5. Henglu Law Firm's Reminder

Three key points of the put option: It protects the exit opportunity and equal conditions, and the detail of the terms determines whether it can be fulfilled; the additional consideration is included in the scope of the put option, which prevents the price from being raised in disguise; and it should be negotiated with the lead underwriting right, so that there are exit and entry channels on both sides. For issues related to the design of investment agreements, you can consult us for further assistance.Business and contract disputes in enterprisesWe provide a comprehensive solution for services, and those involving disputes over equity transactions can be integrated into it.Company and commercial disputesFor plates involving litigation over contract terms, you can refer to the following materials for reference.Contract disputesFor any questions regarding the exit transaction arrangements, please feel free to consult us.Special servicesTeam.

VI. Frequently Asked Questions

Q1: Are there any conflicts between the right of first refusal and the right of first purchase?

There's no necessary conflict, but the order is important: the preemptive right is for shareholders to take over the shares internally, while the right of first refusal is for external transactions; the agreement should clearly specify the exercise order and exemption rules. External buyers usually require that internal preemptive rights be excluded first, so the clauses should be designed to be compatible with both.

Q2: If the founder sells a small portion of the equity, does this also trigger the right of first refusal?

According to the agreement: a threshold ratio can be set (for example, any transfer exceeding 5% at a single time or leading to a change in control will trigger the agreement); for transfers without a threshold, all transfers will be sold together, which will restrict the founders' normal cash-out opportunities.

Q3: If there are non-cash components in the consideration received by the transferor, what should the seller do?

According to the principle of equal conditions, non-cash consideration (stocks, options) should be provided to the acquiring party on an equal basis or converted into cash according to its value. The clause includes "all forms of consideration" in the definition to avoid the disparity of only providing cash and not stocks.

Q4: If I don't exercise the right of early redemption in time, is there still a chance to salvage the put option?

The terms set a time limit for exercising the right and clearly stipulate that failure to do so within the time limit shall be deemed as a waiver, which is difficult to remedy afterwards; for those without a clear time limit, the right shall be claimed within a reasonable timeframe in accordance with the principle of good faith, but it may still fail due to the completion of the transaction settlement. It is necessary to keep written records of the notice of exercising the right.

Q5: If the small shareholder transfers the shares after the deal and the settlement payment fails to arrive, what should they do?

According to the transfer contract, the buyer shall be required to make payment, and the joint and several arrangement with the transferor shall be subject to the provisions of the contract. For large-scale transactions, it is recommended to use fund supervision or installment guarantees, and to include the guarantee of receipt of payment in the documents related to the transfer and delivery.

The above Q&A is mainly based on the judicial practice in Beijing. There may be differences in the adjudication opinions in different regions. It is recommended to consult a professional lawyer based on the specific circumstances of the case.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, so as to avoid missing the statutory time limit. →Business and commercial legal services·Beijing Henglue Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and public adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. In the event of a dispute, please consult a practicing lawyer in a timely manner.