Drag-along and tag-along rights: meaning, how they work in India

They are exit clauses. A startup's shareholders agreement (SHA) is the contract signed by the founders, the investors and the company. Two of its most common clauses deal with the day a buyer wants to purchase shares.

A drag-along right lets a defined group of holders, usually a majority, require everyone else to sell their shares to a buyer on the same terms. A tag-along right, also called a co-sale right, lets a smaller holder insist on selling alongside a bigger holder who is selling to a third party. One clause serves the buyer's wish for a clean deal. The other protects the small holder from being left behind with a new, unwanted partner.

A buyer usually wants all of a company, not 70% of it. A holdout with a small stake can block that. The drag-along removes the block.

The sellers who hold the drag right send a written notice to the other holders. The notice names the buyer, the price, the form of payment and the date. The dragged holders must then sign the share transfer papers and give the same limited promises about their own shares that the dragging sellers give. When the deal closes, the dragged holders are paid on the same per-share basis as the sellers, subject to the rights each class of shares carries.

• Trigger: a genuine offer from an unconnected buyer for the whole company or a large stake.
• Who can drag: often holders of a set share of the company together with named investors, not just anyone.
• Notice: written, with price and terms, and a set number of days to complete.
• Conditions: same price and form of payment, and no extra personal liability for the dragged holders beyond their own shares.
• Waterfall: proceeds follow the liquidation preference in the articles, so preferred investors may be paid first.

A tag-along starts when a shareholder with a large stake, often a founder, wants to sell part of it to an outsider. Before the sale can go ahead, the other holders get an offer to sell the same fraction of their own stake, at the same price, to that buyer.

Say a founder holding 50 shares sells 10, which is one fifth of the founder's stake. A tag-along holder with 30 shares may then sell one fifth of theirs, 6 shares, on identical terms. The right is sometimes limited to investors, and sometimes it also covers employees who hold shares. In practice it stops founders from taking money off the table at a good price while investors stay locked in.

There is no legal figure. The numbers are negotiated, written into the term sheet and then the SHA. The patterns below are common, not rules, and each deal differs.

• Drag-along trigger: consent of holders of a majority of the shares, often between 51% and 75%, plus the consent of named lead investors.
• Floor price: many investors ask that a drag cannot happen below a minimum return, for example below the amount they put in or a set multiple of it.
• Timing: some SHAs allow a drag only after a number of years from the investment, or after a failed IPO window.
• Tag-along: usually every investor and founder, often pro rata to the shares being sold.
• Notice: a few weeks for both clauses, with a short period to match or decline.

As of November 2026, Indian practice relies on two layers. The first is the SHA, which binds the people who sign it as an ordinary contract under the Indian Contract Act, 1872. The second is the articles of association, which bind the company and its members.

For a private company, the Companies Act, 2013 lets the articles restrict share transfers. Section 58 deals with refusal to register transfers and, for a public company, says shares are freely transferable, while a private company's articles can set limits. Lawyers therefore copy the drag and tag wording into the articles, usually by a special resolution, so that the company itself must honour the transfers. Courts have long treated a clause that sits only in a side agreement as weaker than one that is also in the articles, and commentators disagree on how far the Supreme Court has settled this, so deal lawyers do both.

For listed companies the picture differs. Free transferability of listed shares and the SEBI takeover rules mean a private drag clause cannot override market rules, so these clauses are mostly a private-company tool. A forced sale at an unfair price can also be challenged as oppressive to a minority.

For a buyer, a drag-along is what makes an acquisition possible. When a startup is sold, the buyer will often make closing conditional on getting 100% of the shares. Without a drag, a single early angel with a small stake and a grudge can delay the deal.

For founders, the same clause is a risk. If investors hold the drag, they can sell the company at a price the founders dislike. This is why founders negotiate who holds the drag, the minimum price and the timing. For minority holders, tag-along is a protection, and it matters more as a company grows and bigger holders gain the ability to sell without them.

Drags rarely make news on their own. They appear when a company is acquired, when a founder's stake is sold to an outside buyer, or in a dispute among shareholders. A phrase such as sold 100% of the company usually means a drag, or the agreement of every holder, was in play.

If a story says an investor was forced to sell, or a founder challenged a sale, the clause may be at the centre. A story about a founder selling part of a stake may mean investors were offered the tag. Treat both as clues, not proof, since the SHA itself is private.

Drag and tag point in opposite directions. Drag is a power over others. Tag is a protection for oneself. A right of first refusal and a right of first offer are different again: they give existing holders the first chance to buy shares that are being sold, before an outside buyer gets them.

Most SHAs stack them. A holder who wants to sell first offers the shares to existing investors. If nobody buys, the holder may sell to a third party, and the others may then tag along. If a large enough group agrees to a full sale, they may drag the rest. This is general information and not legal advice, so check any clause with a lawyer before signing.