Authored by Kundan Mani Pradhan, CLC, Delhi University
A drag-along clause obliges minority shareholders to sell on the same terms as a defined group of selling holders, It serves a simple commercial function, which is that an acquirer does not often pay for control without taking control of the entire entity. To meet this condition drag-along clauses prevent situations where one unresponsive holder can frustrate a transaction that the majority of holders support. Its legality is equally simple, since the clause removes the minority’s choice, and compels a transfer.
Drag-along clauses are not defined in the Indian law. This piece argues that it is enforceable inter partes as a contract under section 58 of the Companies Act, 2013. The enforceability of drag-along clauses against a company along with its resilience against challenge depend on whether it is incorporated in the Articles of Association and whether it secures substantive parity for dragged holders.
