Introduction

This article is Part 3 of the Shareholder Liquidity & Exit series. Part 1 mapped the full landscape of exit mechanisms available to a shareholder of a Vietnamese company (click here), and Part 2 examined put options in depth (click here). This article turns to two further mechanisms that recur throughout Vietnamese shareholders’ agreements (SHAs) — tag-along rights and drag-along rights — and asks the same two questions we asked of put options: are these rights valid under Vietnamese law, and, if valid, are they actually enforceable in the way the parties intend?

Purposes and Mechanics

1. Tag-Along Rights

A tag-along right is typically triggered whenever a shareholder proposes to transfer more than a specified threshold of its shares to a third party. Before that transfer can complete, the selling shareholder must notify the other shareholders (or those holding tag-along rights specifically) and give them the opportunity to sell a pro rata portion of their own shares to the same buyer, on the same price and terms. The commercial purpose is straightforward: a minority investor did not sign up to hold shares alongside whichever new owner the majority happens to sell to, and a tag-along right lets that investor exit on the same terms rather than being trapped as a minority holder in a changed ownership structure.

2. Drag-Along Rights

A drag-along right operates in the reverse direction. Once a specified threshold of shareholders (often a majority, but sometimes a higher supermajority threshold) agrees to sell to a third-party buyer, the drag-along right allows those shareholders to compel the remaining shareholders to sell their shares to the same buyer, on the same price and terms, whether or not the dragged shareholders actually want to sell. The commercial purpose here is to make the company saleable as a whole: a buyer seeking 100% ownership — which is the overwhelming majority of trade sale and strategic acquisition structures — will often refuse to proceed, or will price in a significant discount, if it cannot be sure of acquiring every share, and a drag-along right removes a minority shareholder’s ability to block or extract a disproportionate premium from that outcome.

Both mechanisms are typically built around the same core drafting variables: a trigger threshold (the percentage of shares that must agree before the right can be invoked), a notice period, a requirement that the dragged/tagging shareholders receive the same price and terms as the initiating shareholders, and mechanics for actually completing the transfer of the non-initiating shareholders’ shares. As the rest of this article explains, each of these variables carries its own validity and enforceability consequences under Vietnamese law.

Validity under Vietnamese Law

1. No statutory basis — a purely contractual footing

Unlike some jurisdictions, the Law on Enterprises 2020 (LOE) does not provide for either a statutory drag-along or a statutory tag-along mechanism. There is no provision analogous to a squeeze-out or sell-out right that would let a majority compel a minority to sell, or let a minority insist on joining a majority’s sale, independently of contract. Both rights therefore exist, if at all, purely as a matter of private contract — generally set out in the SHA — and their validity is tested against the same general contract law framework used for put options: the Civil Code 2015’s freedom-of-contract principle (Articles 3 and 385) and the general validity conditions of Article 117 (capacity, genuine consent, lawful purpose and content, and proper form).

Framed as a conditional civil transaction under Article 120 of the Civil Code — the same doctrinal basis used to analyze put options — a drag-along or tag-along clause is a shareholder’s advance agreement that, upon a specified future, uncertain event (a qualifying sale being agreed by the relevant threshold of shareholders), a transfer obligation will arise. On this basis, both mechanisms are, in principle, valid contractual arrangements under Vietnamese law, in the same way a put or call option is valid. The more interesting validity questions come from how each mechanism interacts with the mandatory rules that already govern share and capital transfers under the LOE.

2. JSC context: interaction with free transferability and charter-based restrictions

For a joint stock company (JSC), the LOE’s default rule is that shares are freely transferable, subject to the founders’ statutory lock-up on ordinary shares during the first three years after incorporation, and subject to any transfer restrictions the company’s charter itself imposes (LOE, Article 127). A contractual drag-along or tag-along mechanism generally sits comfortably within this framework: because the charter is itself permitted to condition or restrict how JSC shares are transferred, reflecting the drag-along/tag-along mechanics in the charter — and not only in the SHA — gives the mechanism a clean statutory hook, rather than relying solely on a private contract between some of the shareholders.

3. LLC context: interaction with the statutory pre-emption mechanic

For a limited liability company (LLC), the position is more delicate. Article 52 of the LOE imposes a mandatory-looking procedure on any member wishing to transfer its capital contribution: the member must first offer the contribution to the remaining members pro rata to their existing holdings, and may only sell to an outside party if the remaining members do not take up that offer in full within a statutory window. A drag-along clause that requires all members to sell directly to an external buyer, without separately running this offer process for each dragged member’s stake, sits in real tension with Article 52 — the outside buyer’s ability to acquire the dragged shares cleanly depends on how (and whether) that statutory pre-emption process has been addressed.

The safest drafting response is to have all members expressly address, and to the extent the LOE permits variation by member agreement, adjust this pre-emption mechanic directly in the company’s charter — rather than leaving it solely as an SHA-level side agreement — so that the charter itself contemplates and clears the path for a drag-along sale without each dragged member’s stake having to separately run the Article 52 offer process at the point of sale. Because the precise scope for contractual variation of Article 52 is a matter that should be confirmed against the specific charter and the prevailing text of the LOE at the time of drafting, this is an area where bespoke legal advice at the drafting stage is particularly important, rather than relying on generic SHA boilerplate.

4. Tag-along as a restriction on the selling shareholder’s shares; drag-along as a contractual right to compel

A tag-along right is a genuine restriction on the selling shareholder’s own shares: it conditions that shareholder’s freedom to sell by requiring it to first give the tagging shareholders the opportunity to join the sale on the same terms. That is exactly what Article 127.1 of the LOE addresses — a charter-based restriction on share transfer only takes effect once it is stated on the relevant share certificate — and, because it is the selling shareholder’s own disposal being conditioned, it is the selling shareholder’s own certificate that must carry the restriction for it to bind the company or a transferee.

A drag-along right is different in kind. The dragged shareholder is not the one seeking to transfer; it is being compelled to do so. The better view is that drag-along is a contractual right of the initiating shareholder than to an Article 127 restriction — so charter and certificate treatment remains good drafting practice for notice and privity purposes, but does not by itself convert the right into a transfer restriction or give the company a basis to refuse registration on that ground alone.

The exception is a drag-along triggered by the dragged shareholder’s own default (a breach of the SHA, a missed capital call, and the like). There, the obligation to sell arises from that shareholder’s own conduct, not from someone else’s sale, and operates like a compulsory transfer or forfeiture condition. On this narrower point the position mirrors tag-along: the default-triggered drag-along should, for the same Article 127.1 reasons, be recorded in the charter and printed on the dragged shareholder’s own certificate.

The practical upshot: tag-along and a default-triggered drag-along call for charter-and-certificate treatment as a matter of Article 127.1 formality; an ordinary, sale-triggered drag-along calls for it only as good practice, with its real enforceability continuing to depend on the privity and practical-compulsion issues addressed in Section IV below.

5. Statute-specific constraints shared with put options

The same statute-specific constraints identified for put options apply equally to a drag-along or tag-along sale: a transfer that would push a foreign shareholder beyond the applicable foreign ownership limit, or into a conditional sector without the requisite approval, risks being unenforceable as to the excess, however validly the drag-along or tag-along clause was agreed as between the parties. A drag-along sale to a foreign buyer, in particular, needs to be checked against these limits before the mechanism is invoked, not only at the point the SHA is drafted.

6. Freedom of contract and the shareholder’s own disposal rights

A drag-along clause, more than a put option, raises an intuitive question: can a shareholder validly bind itself, in advance, to sell its own property on terms it does not control at the time of sale? Vietnamese civil law protects an owner’s right to dispose of its own property (Civil Code, Articles 158 to 164), but this is a default entitlement, not a mandatory rule that prevents an owner from validly agreeing, for consideration and with genuine consent, to a conditional future disposal of that same property — the same logic that makes a put or call option valid in the first place. Provided the shareholder had capacity and gave genuine, uncoerced consent at the time it agreed to the drag-along clause, and provided the clause does not otherwise offend a specific mandatory prohibition, the better view is that a drag-along obligation is validly binding on the shareholder who agreed to it. The practical difficulty, addressed in the next section, is less about whether the clause is valid and more about how it can actually be enforced — both against the shareholder who agreed to it, and against anyone who was not a party to that agreement in the first place.

Enforceability under Vietnamese Law

1. Privity: binding only the SHA’s own signatories

The most immediate enforceability problem for both mechanisms is privity of contract. An SHA is a private agreement, and as a general matter of Vietnamese contract law it binds only the parties who signed it. A shareholder who was never a party to the SHA — whether because it held shares before the SHA was entered into and never acceded to it, or because it acquired shares afterward through a transfer that did not require it to accede — is not bound by a drag-along or tag-along clause the SHA purports to impose, however clearly that clause is drafted.

The standard drafting response is twofold: first, reflect the substance of the drag-along and tag-along mechanics in the company’s charter as well as the SHA, since the charter binds all shareholders as a condition of holding shares in the company, not only those who signed a particular contract; and second, make execution of a deed of accession to the SHA — by which an incoming shareholder expressly agrees to be bound by the existing SHA, including its drag-along and tag-along provisions — a condition precedent to any transfer of shares to a new holder, whether that transfer happens by sale, by operation of a pre-emption right, or otherwise. Relying on the SHA alone, without either safeguard, leaves a real risk that the mechanism cannot be enforced against exactly the shareholder it may most need to bind.

2. Practical mechanics of compelling an unwilling minority (drag-along specifically)

Even against a shareholder who is validly bound, a drag-along right still needs a practical mechanism to compel that shareholder’s cooperation if it refuses to sign the transfer documents once dragged. This is the same enforcement problem examined in depth in Part 2 of this series for put options, and the same menu of tools — and the same limitations — applies here:

  • Pre-signed, undated transfer documents signed by each shareholder at the time the SHA (or a deed of accession) is executed, to be dated and used if that shareholder is later dragged. As explained in Part 2, this is considerably weaker in practice than it looks: registrars and counterparties may treat a stale, pre-signed document as inconsistent with the genuine, contemporaneous consent the Civil Code requires (Articles 117 and 122), particularly if significant time has passed or circumstances (such as a change in the company’s charter capital or registered details) have moved on since signature.
  • A power of attorney authorizing the majority, the company, or a designated agent to execute transfer documents on the dragged shareholder’s behalf. As with put options, a POA of this kind does not survive the grantor’s death, and can be terminated unilaterally by the grantor at any time before it is exercised, which limits how much comfort a majority can place on it as a self-executing solution.
  • Specific performance or injunctive relief sought through litigation or arbitration, which remains the fallback where the shareholder refuses to cooperate and no self-executing mechanism has been put in place — with all the cost and timing disadvantages that implies for a transaction that is usually running on a tight closing timetable.

3. Timing mismatch with required licensing and statutory pre-emption procedures

A drag-along or tag-along clause is typically drafted around a fixed notice and completion timetable running from the trigger date. That timetable assumes the transfer can proceed once the shareholders have agreed; in practice, two processes outside the shareholders’ control can each throw it off — a regulatory approval the foreign buyer may need such as an acquisition approval or a merger clearance which may take a few months to obtain, and a pre-emptive right the remaining shareholders or members may hold over the shares being sold — and neither can be accelerated by agreement between the shareholders alone.

None of this is visible from the face of a typical drag-along or tag-along clause, which is usually drafted as if execution and completion were purely a function of the shareholders’ own cooperation. Where the buyer needs regulatory approval, the SHA’s fixed notice and completion periods can become impossible to meet: the dragged or tagging shareholders may be asked to sign transfer documents and hold them pending an approval of uncertain timing, or the SHA’s long-stop date may lapse before approval is granted.

The more workable response addresses both problems the same way: separate the notice and completion mechanics from a fixed calendar deadline. Condition completion on receipt of the regulatory approval, with the notice period running from — or the long-stop date tolled until — the approval date, and allocate the risk and cost of delay or refusal among the initiating shareholders, the dragged or tagging shareholders, and the buyer. Likewise, build the notice period to run only after every affected member or shareholder has let its offer period lapse or given a valid, dated waiver for the specific transfer. An advance, generic waiver given on accession to the SHA is a useful fallback, but its enforceability against a member who later declines to reaffirm it is doubtful, for the same genuine-consent reasons that limit pre-signed transfer documents  — treat it as a secondary safeguard, not a substitute for building the pre-emption timeline into the notice period itself.

4. Drag-along price below fair market value on a default trigger: the penalty-cap analogy

Most drag-along clauses price the dragged shares at whatever the buyer agreed with the initiating shareholders — raising no separate concern, since the dragged shareholder gets the same terms as everyone else. Some SHAs depart from this where the drag-along is triggered by the dragged shareholder’s own default — a breach, a missed capital call, a failure to meet a milestone — and set the price at a discount to fair market value, sometimes a fixed percentage or a book-value formula.

That pricing issue mirrors the discounted put option price on default discussed in Part 2: a price depressed only because the counterparty defaulted functions as a deterrent, not a genuine measure of value. Where the SHA is a commercial contract, Article 301 of the Law on Commerce 2005 caps any penalty at 8% of the breached obligation, and a discount a tribunal characterizes as a disguised penalty risks being reduced to that ceiling regardless of what the SHA calls it — consistent with Vietnamese courts’ willingness to re-characterize and cap penalty clauses however labelled. Even under the Civil Code’s general penalty provisions, a penalty is treated as different in kind from a price term, so making the sale price itself the penalty mechanism invites the same re-characterization risk.

The more defensible structure keeps the two functions apart: price a default-triggered drag-along sale by an objective measure of fair market value — an independent valuation or a pre-agreed formula, applied regardless of the trigger — and address the default itself separately, as a damages or penalty claim subject to proof of loss or the Article 301 cap. Collapsing the two into a single discounted price doesn’t remove the penalty-cap issue; it just hides it until challenged.

Recommendations

  • Reflect drag-along and tag-along mechanics in both the SHA and the company’s charter, so the obligation binds all shareholders as a condition of holding shares in the company, not only those who signed a particular SHA.
  • Require a deed of accession to the SHA as a condition precedent to any transfer of shares to a new shareholder, so incoming shareholders cannot inadvertently escape the drag-along/tag-along mechanics through a gap in privity.
  • For LLCs, expressly address the interaction with the statutory pre-emption procedure under Article 52 of the LOE at the drafting stage, ideally in the charter itself, rather than leaving the tension between a drag-along sale and the statutory offer process unresolved until a transaction is underway.
  • Mirror the tag-along mechanic and/or default-based drag-along mechanic in the charter and print it on the selling shareholder’s share certificate, since under Article 127.1 of the LOE a charter-based restriction on a shareholder’s own share disposal only takes effect once it is stated on that shareholder’s certificate, and an SHA-only tag-along clause risks being unenforceable as a restriction against the company or a transferee. Reflect the ordinary drag-along mechanic in the charter as well, for notice and privity purposes, but do not treat this as a substitute for the contractual and practical-compulsion safeguards a drag-along right still needs.
  • Condition completion on receipt of any required regulatory approval rather than a fixed calendar deadline, such as the Law on Investment acquisition approval for a foreign buyer or a merger clearance, and expressly allocate the risk and cost of approval delay or refusal among the parties.
  • Sequence the notice period to run only after every affected shareholder’s or member’s pre-emptive right has lapsed or been validly waived, so that a drag-along or tag-along transfer is not attempted while a statutory offer period or a charter-based right of first refusal is still open.
  • Where a drag-along right can be triggered by a shareholder’s default, price the resulting sale at a genuine fair market value determined independently of the default, and address any penalty for the default itself through a separate damages or penalty clause, mindful of the 8% cap on contractual penalties under Article 301 of the Law on Commerce 2005 where that law applies to the SHA.