Drag-along and tag-along rights are standard provisions in shareholders agreements for Indian private companies. They are frequently drafted poorly, often because they are copied from precedents without adequate consideration of how they will work in practice. When a liquidity event actually occurs, poorly drafted provisions create disputes that delay transactions and destroy value.
This article explains what these rights are, why they matter, and what good drafting looks like.
What Is a Drag-Along Right
A drag-along right allows a majority shareholder (or a defined group of shareholders holding a majority) to require the remaining shareholders to sell their shares on the same terms in a third-party sale. The purpose is to ensure that a majority who wants to sell can deliver 100% of the company to a buyer, without being held up by minority shareholders who do not want to sell or who want to extract a premium for their consent.
Without a drag-along right, a buyer seeking to acquire 100% of a company would need to negotiate individually with every shareholder. This gives small minority holders significant leverage and can cause deals to fall apart entirely.
What Is a Tag-Along Right
A tag-along right is the mirror image. It allows minority shareholders to participate in a sale by a majority shareholder on the same terms. If the majority sells their shares to a third party, the minority can require the buyer to purchase their shares too, at the same price per share.
The purpose is to protect minority shareholders from being left behind when control of the company changes hands, facing a situation where they hold shares in a company controlled by a buyer they did not choose, on terms they had no say in.
In practice, drag-along and tag-along provisions can conflict with each other. A drag-along requires a sale to proceed on the same terms for all shareholders. A tag-along gives minority shareholders the right to join the sale. Where the buyer does not want to acquire minority shares, or where the minority wants a higher price, these provisions create a direct tension that must be addressed in the drafting.
Common Drafting Failures
The most common failure in drag-along drafting is not specifying the threshold clearly. If the drag right is exercisable by shareholders holding more than 50% of shares, but the company has multiple share classes with different voting rights, the majority calculation may be unclear. The provision must specify which shares count towards the threshold and whether the calculation is by number of shares, voting rights, or economic interest.
A second common failure is not addressing the price mechanism. If the drag price must be the same for all shareholders but different share classes have different liquidation preferences or economic rights, what does same price mean? A provision that says all shareholders must receive the same price per share may not reflect the economic bargain if preference shareholders are entitled to priority returns.
Tag-along provisions commonly fail because they do not specify the notice period, the mechanism for the minority to elect to participate, and what happens if the buyer refuses to purchase the tagged shares. If the agreement simply says the minority has tag-along rights without specifying the mechanism, it may be unenforceable in practice.
Carve-Outs and Exceptions
Both drag-along and tag-along provisions typically include carve-outs. Transfers to affiliates or related parties are commonly excluded from tag-along rights, as are transfers pursuant to intra-group reorganisations. The drag-along is often limited to arm's length third-party sales rather than transfers between existing shareholders.
The drag-along should also address what protections are available to dragged shareholders. Dragged shareholders are typically entitled to require that they receive the same price, terms, and conditions as the majority, that they are not required to give representations and warranties beyond those relating to their own ownership of shares, that their liability is capped at the consideration they receive, and that they are not required to agree to post-completion restrictive covenants.
The Enforceability Question Under Indian Law
Both drag-along and tag-along rights are enforceable under Indian law as contractual obligations. However, specific performance of a drag-along right in practice requires either the cooperation of the refusing shareholder or a court order. Indian courts have upheld drag-along provisions, but the process of obtaining enforcement can be slow and can cause a transaction to collapse.
Some shareholders agreements include a power of attorney granted by each shareholder to a nominated person, allowing that person to execute transfer documents on behalf of a shareholder who refuses to comply with a drag. Where these are properly structured and irrevocable, they provide a more immediate enforcement mechanism than litigation.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. It does not create a lawyer-client relationship. For advice specific to your situation, please consult a qualified legal professional. LawCite Advocates is a law firm registered in India.