Drag-along rights are a familiar feature of private company constitutions and shareholders’ agreements. They allow majority shareholders who have agreed to sell their shares to require minority shareholders to participate in the transaction on the same terms. Commercially, they provide transaction certainty and allow a purchaser to acquire 100% ownership without the risk that minority shareholders may frustrate the sale.
For companies subject to the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth), however, drag-along rights raise more complex issues.
The difficulty is that drag-along rights can operate in a manner analogous to compulsory acquisition provisions. They allow one shareholder or group of shareholders to require another shareholder to dispose of their shares, even where that shareholder may not independently wish to sell.
This raises a broader question: to what extent can shareholders use contractual arrangements in a company’s constitution to achieve an outcome that Chapter 6 otherwise regulates through a detailed statutory regime?
Drag-along rights and Chapter 6
The starting point is section 608, which provides that a person has a relevant interest in securities where they have power to control the exercise of voting rights attached to those securities or control the disposal of those securities.
A drag-along right may give rise to a relevant interest because it gives a shareholder the ability to require another shareholder to dispose of their shares.
For a Chapter 6 company, this creates a potential issue under section 606. Unless an exception applies, a person must not acquire a relevant interest in issued voting shares if the acquisition would increase their voting power above 20%, or increase their voting power from a position above 20% and below 90%.
Section 609(7) provides one potential solution. It applies to an agreement conditional on an item 7 resolution, subject to requirements including that the agreement does not confer control over voting rights or restrict disposal for more than three months.
Ringers Western – careful drafting may avoid an immediate contravention
In Ringers Western, the Panel considered drag-along provisions contained in the company’s constitution in the context of a bonus share issue that took RW Trust from 63.31% to 99.94%.
The drag-along provisions allowed the board to issue a drag-along notice requiring shareholders to sell their shares where certain conditions were satisfied. Importantly, the constitution provided that the drag-along right was, while Chapter 6 applied, subject to an item 7 approval under section 611 being obtained and any necessary ASIC relief being provided.
The Panel accepted that the drag-along provisions did not give rise to an immediate relevant interest because, while Chapter 6 applied, the power to give a drag-along notice was conditional upon item 7 approval and therefore fell within section 609(7).[1]
The decision demonstrated that it is possible, in principle, to draft a constitutional drag-along provision in a way that avoids an immediate contravention of Chapter 6.
However, Ringers Western did not determine whether item 7 approval would ultimately be available in practice for a constitutional drag-along mechanism.
That question became more significant in Mobile Asset Holdings.
Mobile Asset Holdings – the limits of contractual drafting
In Mobile Asset Holdings, the Panel considered proposed constitutional amendments introducing drag-along and tag-along rights. The drag-along provisions enabled shareholders holding more than 50% to compel minority shareholders to transfer their shares to a proposed acquirer.
The Panel found that the proposed drag-along provisions created relevant interests because they gave shareholders the ability to require other shareholders to dispose of their shares. Unlike Ringers Western, the provisions were not drafted so that their operation was expressly conditional upon obtaining an item 7 approval under section 611.[2]
The Panel concluded that the provisions created unacceptable circumstances because they created a mechanism for the acquisition of 100% of Mobile Asset Holdings in a manner that circumvented the protections of Chapter 6 and gave rise to a potential contravention of section 606 if no section 611 exception applied.[3]
The decision reinforces that constitutional drafting cannot be considered in isolation from the operation of Chapter 6.
The issue is not that drag-along rights are inherently inconsistent with Chapter 6. Rather, the concern is that drag-along provisions may seek to achieve a commercial outcome similar to compulsory acquisition without following the statutory processes that regulate control transactions.
The unresolved practical issue – item 7 approval and section 140(2)(c)
The more fundamental issue arising from Mobile Asset Holdings is whether the approval mechanism contemplated by Ringers Western is capable of operating in practice.
Item 7 of section 611 permits shareholders to approve an acquisition of a relevant interest that would otherwise contravene section 606. However, the voting exclusions in item 7 are significant. The resolution must not be voted on by persons (and their associates) from whom the acquisition is to be made or persons (and their associates) who are proposed to make the acquisition.[4]
ASIC submitted in Mobile Asset Holdings that these voting restrictions may create a structural difficulty for constitutional drag-along provisions.
ASIC’s concern was that shareholders who agree to be bound by drag-along provisions may themselves be parties to the relevant transaction, because the constitutional mechanism is the arrangement through which one shareholder obtains the ability to require another shareholder to transfer their securities.[5]
If that analysis is correct, shareholders who would otherwise approve the item 7 resolution may themselves be excluded from voting on that resolution. The consequence may be that there is no shareholder group capable of approving the drag-along mechanism without ASIC relief.
The Panel did not need to finally determine this issue because the provisions in Mobile Asset Holdings were not drafted in the same manner as those in Ringers Western. However, the Panel noted ASIC’s submission that item 7 may not be ‘structurally available’ in these circumstances.[6] That observation is important, as it means that conditional drafting may avoid an immediate section 606 problem, but it does not necessarily solve the practical approval problem.
A separate but related issue arises under section 140(2)(c) of the Corporations Act.
Section 140 provides that a company’s constitution has effect as a contract between the company and its members. However, section 140(2)(c) provides that a member is not bound by a modification to the constitution made after they became a member to the extent that the modification imposes or increases restrictions on the member’s right to transfer shares, unless the member agrees in writing.
ASIC submitted that drag-along provisions engage section 140(2)(c) because they restrict a shareholder’s ability to decide whether and when to transfer their shares. The Panel agreed with ASIC and the applicant that the drag-along rights enlivened section 140(2), because shareholders could not freely exercise their right to sell their shares if an effective drag-along notice was in force. The Panel noted that the position in relation to tag-along rights was less clear and did not need to determine that issue.[7]
Importantly, the requirement for a shareholder to agree to be bound by a drag-along provision for the purposes of section 140(2)(c) relates only to the act of being “dragged”. A shareholder may still participate in the enforcement of the drag-along right, even if that shareholder has not agreed to be bound by the transfer restriction for the purposes of section 140(2)(c). Accordingly, the adoption of a drag-along provision without appropriate conditions may immediately give each shareholder a relevant interest in the securities of each other shareholder, irrespective of whether each shareholder has agreed to the restriction under section 140(2)(c).
These issues highlight the broader difficulty with constitutional drag-along rights. Even if provisions can be drafted to avoid an immediate contravention of section 606, questions remain as to whether the necessary shareholder approval can practically be obtained and whether existing shareholders can be bound by the restriction.
Practical implications
The decisions in Ringers Western and Mobile Asset Holdings demonstrate that drag-along rights in the constitution of a company regulated by Chapter 6 involve issues that go beyond drafting.
The principles underlying Chapter 6 are reflected in section 602, which seeks to ensure that the acquisition of control over the voting shares of public companies takes place in an efficient, competitive and informed market and that shareholders have a reasonable and equal opportunity to participate in the benefits arising from a proposal under which a person would acquire a substantial interest.
While Ringers Western confirms that carefully drafted provisions may avoid an immediate contravention of section 606, Mobile Asset Holdings highlights the difficulty of replicating the commercial effect of compulsory acquisition through contractual arrangements.
For companies considering constitutional drag-along provisions, the key question is whether drafting can avoid an immediate Chapter 6 issue while remaining consistent with the statutory limits on new transfer restrictions and the broader policy objectives underpinning Australia’s takeover regime.
[1] Ringers Western Limited 02R [2024] ATP 17 at [59]–[65].
[2] Mobile Asset Holdings Ltd [2026] ATP 7 at [54]–[57].
[3] Mobile Asset Holdings Ltd [2026] ATP 7 at [31]–[33], and Annexure C – Declaration of Unacceptable Circumstances at [9].
[4] Section 611 item 7(a) of the Corporations Act 2001 (Cth).
[5] Mobile Asset Holdings Ltd [2026] ATP 7 at [31].
[6] Mobile Asset Holdings Ltd [2026] ATP 7 at [76]–[78].
[7] Mobile Asset Holdings Ltd [2026] ATP 7 at [34]–[40].