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Corporate Drag-Along Disputes.

1. Meaning of Drag-Along Rights

A Drag-Along Right is a contractual right (usually in a Shareholders’ Agreement or Articles of Association) that allows:

Majority shareholders or investors

To compel minority shareholders
to sell their shares to a third-party buyer on the same terms and price when a qualifying sale occurs.

The objective is to:

Deliver clean exit and full control to the buyer,

Avoid hold-out by minority shareholders,

Facilitate PE exits and strategic sales.

2. Typical Situations Leading to Drag-Along Disputes

Drag-along disputes usually arise when minority shareholders allege:

Undervaluation of shares,

Lack of consent or notice,

Breach of fiduciary duty by promoters/directors,

Oppression or unfair prejudice,

Drag-along not incorporated into Articles of Association,

Violation of SEBI or Companies Act protections.

3. Legal Framework Governing Drag-Along Rights in India

4. Core Legal Issues in Drag-Along Disputes

(a) Articles vs Shareholders’ Agreement

Indian courts consistently hold that:

Articles of Association prevail over private contracts.

Drag-along rights not reflected in Articles may be unenforceable against non-signatories.

(b) Minority Oppression and Unfair Prejudice

Forced exit at an unfair price or process may amount to:

Oppression under Sections 241–242 of the Companies Act,

Abuse of majority power.

(c) Fiduciary Duties of Promoters and Directors

Promoters exercising drag-along rights must:

Act in good faith,

Ensure fair valuation and transparency,

Avoid self-enrichment at minority’s cost.

(d) SEBI Takeover Code Constraints

In listed companies:

Drag-along cannot override mandatory open offer rights,

Preferential exits for certain shareholders are prohibited.

5. Enforceability Conditions for Drag-Along Rights

A drag-along clause is more likely to be upheld if:

Incorporated into Articles of Association,

Triggered by a bona fide third-party sale,

Provides equal price and terms to minorities,

Includes procedural fairness (notice, valuation).

6. Judicial Treatment and Case Laws

1. V.B. Rangaraj v. V.B. Gopalakrishnan

Supreme Court of India

Principle:

Share transfer restrictions must be in the Articles to bind shareholders.

Relevance:

Foundational authority in drag-along enforceability disputes.

2. Vodafone International Holdings BV v. Union of India

Supreme Court of India

Principle:

Shareholder rights are governed by contract, but subject to corporate law and public policy.

Relevance:

Recognises drag-along as a contractual exit right, subject to fairness and law.

3. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.

Supreme Court of India

Principle:

Directors cannot use power to oppress minority shareholders.

Relevance:

Applied in disputes alleging abusive drag-along exits.

4. Dale and Carrington Investment Pvt. Ltd. v. P.K. Prathapan

Supreme Court of India

Principle:

Allotments or transactions conferring control unfairly can be invalidated.

Relevance:

Used to challenge drag-along exercises favouring promoters.

5. Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad

Supreme Court of India

Principle:

Oppression includes lack of probity and fair dealing.

Relevance:

Minority shareholders rely on this to resist forced exits.

6. Miheer H. Mafatlal v. Mafatlal Industries Ltd.

Supreme Court of India

Principle:

Courts examine fairness, reasonableness, and absence of coercion.

Relevance:

Drag-along via schemes of arrangement subject to fairness review.

7. Re Bluebrook Ltd

English High Court (Persuasive Authority)

Principle:

Drag-along rights must be exercised strictly in accordance with contract.

Relevance:

Frequently cited in Indian arbitration and NCLT pleadings.

8. Revlon, Inc. v. MacAndrews & Forbes Holdings

Delaware Supreme Court (Persuasive Authority)

Principle:

When sale of control occurs, duty shifts to value maximisation.

Relevance:

Supports minority challenges against undervalued drag-along exits.

7. Drag-Along Rights vs Minority Protection (Comparison)

8. Common Grounds on Which Drag-Along Is Challenged

Not in Articles of Association,

Price not fair or market-linked,

Trigger conditions not satisfied,

Selective benefit to promoters,

Violation of SEBI or FEMA norms.

9. Best Practices to Avoid Drag-Along Disputes

Mirror drag-along clauses in Articles,

Independent valuation or fairness opinion,

Equal treatment of all shareholders,

Adequate notice and disclosure,

Clear regulatory carve-outs.

10. Conclusion

Corporate drag-along disputes in India lie at the intersection of contract law, corporate governance, and minority protection. Indian courts and tribunals adopt a fairness-oriented and substance-over-form approach, ensuring that:

Majority power is not abused,

Minority shareholders are not coerced,

Exit mechanisms reflect genuine value maximisation.

A drag-along clause is not illegal—but its exercise is intensely scrutinised.

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