Tag-along and drag-along rights are exit mechanisms that allocate the risk and the benefit of a sale of control. A tag-along right entitles a minority shareholder to participate in a sale by the majority on the same terms. A drag-along right entitles the majority to compel the minority to sell its shares on the same terms as the majority’s sale. Both rights are common in shareholders’ agreements and private equity transactions, and both raise questions of enforceability under Indian law.
The Contractual Basis
Section 58(2) of the Companies Act, 2013 provides that any contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract. The provision is the statutory foundation for tag-along and drag-along rights, and it confirms that the rights are enforceable between the parties to the agreement, even if they are not incorporated in the articles.
The Supreme Court’s decision in Vodafone International Holdings recognised that tag-along rights can be binding on the parties as a matter of contract. The Delhi High Court has enforced a drag-along clause through specific performance where the clause was clear and the majority had complied with its terms.
The Limits
The enforceability of a drag-along right is subject to the oppression jurisdiction. The NCLT can set aside a drag-along sale where the price is unfair, where the process is not transparent, or where the sale is part of a pattern of conduct that is oppressive to the minority. The Vakilsearch analysis notes that a drag-along cannot be used to force a minority sale at a discounted price, because such conduct would be challenged as oppressive under Section 241.
The tag-along right is less controversial, but it can also raise issues where the majority sells to a related party at a price that is not available to the minority. The right is designed to ensure that the minority receives the same price and the same terms as the majority, and a breach gives rise to a contractual claim.
The Drafting
A well-drafted tag-along or drag-along clause specifies the trigger, the notice requirements, the price, the terms, and the remedy for breach. The clause should be incorporated in the articles where the parties intend it to bind the company and all the shareholders, and it should be supported by a separate contractual obligation in the SHA.
The enforceability of the right depends on the clarity of the clause and the fairness of the process. A clause that is vague or that gives the majority an unfettered discretion is less likely to be enforced.
Call to Action
Anuj Desai & Associates advises companies, founders, and investors on tag-along and drag-along rights—from the drafting of the clause and the incorporation into the articles to the enforcement of the right and the defence against an oppression claim. If your exit rights are being challenged, we can help you assess the position.
📧 office@anujdesaiassociates.com
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