Drag-Along Rights

Drag-along rights allow specified shareholders (typically investors holding a majority of preference shares, sometimes together with the Board) to force all other shareholders to sell their shares on the same terms when a qualifying exit is on the table.

Why investors insist on drag:

Without drag, a minority shareholder — including a disgruntled co-founder or early angel — can block a 100% sale to a strategic acquirer, who almost always wants full ownership. Drag protects exit optionality.

Typical Indian SHA clause structure:

• Trigger: An offer to acquire 100% of share capital at a price not below a defined minimum return (e.g., 2x or 3x invested capital, or post a long-stop date).
• Initiating party: usually 'Investor Majority' — preference shareholders representing ≥ 51% (or 75%) of CCPS by value.
• Procedure: Drag notice issued to all 'Dragged Shareholders' specifying buyer, consideration per share, payment terms, and closing date.
• Obligations of dragged shareholders: execute the share purchase agreement, deliver shares free of encumbrances, give pro-rata representations and warranties (typically capped at consideration received).
• Carve-outs: Pari-passu treatment for the same class; no asymmetric indemnities; option-holders may be cashed out or rolled.

Counterbalancing minority protections:

• Tag-along rights (the opposite) — let minority join a sale by majority on the same terms.
• Right of First Refusal (RoFR) / Right of First Offer (RoFO) typically apply before drag is triggered.

Indian-context notes:

• Section 58 of the Companies Act 2013 permits restrictions on transfer in a private company under its AoA — drag clauses must be reflected in the AoA to be enforceable against the company.
• The Supreme Court has upheld drag clauses contained in shareholders' agreements when also embedded in the AoA (*Vodafone International* and progeny).
• Founder lock-in in SHAs is sometimes coupled with drag — founders cannot transfer without investor consent during lock-in, but can be dragged into an investor-led sale.

Pitfall: Negotiating drag with no minimum return floor or no minimum-tenor-passed condition means founders can be force-sold cheaply soon after a round. Always insist on a minimum return / minimum hold period.