What is the difference between drag-along and tag-along rights?

Drag-along: majority forces minority to sell. Tag-along: minority has the right to participate in a sale the majority is making — if the majority gets a good offer, the minority can sell at the same terms. Drag protects majority/acquirers; tag protects minority shareholders.

Can drag-along rights be used to sell to a competitor?

Yes, unless the SHA specifically carves out certain acquirers. Founders should negotiate carve-outs for strategic acquirers they would find unacceptable — particularly direct competitors or companies in restricted jurisdictions. These carve-outs are negotiable but must be specified at term sheet stage.

Should founders accept drag-along rights?

Practically yes — it's standard and refusing creates friction. But negotiate the threshold (75%+ rather than 50%), the notice period, and any acquirer carve-outs. The threshold is the critical variable: high threshold (75%+) means investors can't drag founders without significant supermajority; low threshold (50%+) gives investors disproportionate control over exits.

Glossary

Drag-Along Rights

Name: AletheiaAI
Author: Amit Tyagi

A clause that allows majority shareholders to force minority shareholders to participate in a company sale on the same terms.

By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary

Definition

Drag-along rights allow the majority of shareholders (or specific investor classes) to compel all other shareholders to sell their shares if a majority approve an acquisition. The "dragged" shareholders must sell at the same price and on the same terms as the dragging shareholders — they cannot block the deal or hold out for better terms.

Without drag-along rights, a single shareholder with a small stake could block an otherwise approved acquisition by refusing to sell — which is why investors require these rights. For founders, drag-along rights mean that investor approval of an acquisition can force you to sell your shares even if you disagree.

India Context

Indian SHA agreements routinely include drag-along rights, typically triggered when shareholders representing 75%+ of shares approve an acquisition. The threshold matters: a 75% drag threshold means investors with 25% ownership cannot be forced to sell alone. Founders should ensure the drag threshold requires genuine majority — not just investor approval without founder alignment.

Indian company law (Companies Act Section 235) has specific requirements for squeeze-out of minority shareholders — drag-along provisions in the SHA are enforced through contractual mechanisms and must be consistent with Companies Act squeeze-out rules at very high ownership percentages.

Example

Investors own 45% of a startup. They receive a ₹150 crore acquisition offer they want to accept. Founders (55%) disagree — they want to hold for an IPO at ₹400 crore. The SHA has a drag-along trigger at 60% shareholder approval. Investors have 45%, not 60% — they cannot drag founders. If investors held 61%, they could force the sale. The threshold negotiation directly determines founder control in exit scenarios.

Frequently Asked Questions

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