When it comes to operating a business in Singapore, there are many legal considerations to keep in mind. One vital aspect that often gets overlooked is the shareholders’ agreement. In this guide, we will break down what a shareholders’ agreement is and why it is crucial for any business in Singapore.
What is a Shareholders’ Agreement in Singapore?
A shareholders’ agreement in Singapore refers to a contract that establishes how a company will be managed to make sure that the business functions smoothly. Shareholder agreements usually encompass various issues, such as:
- Company’s business plans
- Dividend policies
- Company board composition
- Capital structure
- Rights and responsibilities of various stakeholders, such as the company directors, investors, and shareholders
Through this shareholder agreement, shareholders may obtain the power to appoint the Board of Directors. Directors may be offered control over certain management decisions.
Shareholders need not sign a shareholders’ agreement and should therefore only enter into one voluntarily.
What is the Purpose of a Shareholders’ Agreement and Why is it Important?
As mentioned, there are several reasons to have a shareholders’ agreement. Apart from these reasons, there are also advantages of a shareholders’ agreement.
We detail the key points:
The Role of the Shareholders’ Agreement
Defines Shareholders’ Rights, Powers, and Responsibilities
A key component of the agreement is to explicitly define each shareholder’s rights, powers, and responsibilities. Doing this helps everyone understand their specific role within the company and avoid potential conflicts or misunderstandings, therefore facilitating a harmonious working relationship.
Establishes Management and Governance Protocols
The agreement sets out guidelines for voting rights, management structure, and board composition by establishing a clear framework for the company’s governance. The agreement contributes to making a well-defined management structure by defining the board of directors’ roles and responsibilities and outlining the decision-making authority.
Allocates Company Shares
The allocation of company shares is another key function of the shareholders’ agreement. It metes out the percentage of shares each shareholder holds, hence providing transparency, preventing potential disputes, and ensuring that the ownership structure is clearly defined. This gives shareholders a clear understanding of their ownership.
Summarises Decision-making Processes
A company’s success depends on many key factors, including effective decision-making. The shareholders’ agreement is pivotal in establishing the mechanisms that dictate how key decisions are made. Companies tend to choose corporate secretarial services to ensure compliance with Singapore’s regulations. The agreement outlines decision-making processes, such as quorum requirements and voting procedures for an impartial and efficient process.
Benefits of a Shareholders’ Agreement
Ensures Clarity and Prevents Disputes
A shareholders’ agreement can minimise the chances of disputes occurring as it clearly sets out the rights and responsibilities of each shareholder. Hence, it acts as a strong foundation for smooth decision-making processes while creating a clear strategy to resolve possible conflicts.
Protects the Interests of Minority Shareholders
A properly written shareholders’ agreement makes sure that the interests of shareholders holding minority stakes are protected. A minority shareholder frequently faces difficulties with having their opinions and concerns acknowledged. This is especially so for situations where majority shareholders have greater decision-making power.
A shareholders’ agreement can tackle this problem by including provisions requiring majority shareholders to consult and seek the minority shareholders’ input before making significant decisions. Such an agreement also include provisions to prevent the dilution of minority shareholders’ ownership stakes. This can be attained with pre-emptive rights that give minority shareholders the chance to buy additional shares before they are offered to external parties.
Protects Sensitive Information
Unlike the company constitution, a shareholder agreement is not open for public inspection. This makes it a valuable tool for protecting sensitive information and maintaining confidentiality among shareholders.
Supports Seamless Business Functioning
A shareholders’ agreement enables a business to function smoothly. It dictates clear procedures for appointing company directors, conducting meetings, and resolving conflicts. This clarity provided can get rid of roadblocks and encourage a harmonious working environment.
For example, it can establish guidelines for carrying out meetings, such as the frequency and format, enabling all shareholders to have an equal chance to take part and contribute to essential decision-making processes.
Is a Shareholder Agreement Necessary?
A shareholder agreement can be useful as a tool to supplement the company constitution, especially if:
- The company shareholders want to add unique or specific clauses in the agreement
- The company uses the Model Constitution template that the Accounting and Corporate Regulatory Authority (ACRA) provides
This is because the Model Constitution only mentions broad provisions related to company governance. Conversely, a shareholders’ agreement has more vested provisions that tackle the specific business requirements of the company and shareholders’ concerns.
Minority shareholders may also feel that it is better to have a separate shareholder agreement rather than integrating its provisions into the company constitution. This is because a shareholder agreement can only be changed after all parties in the agreement have consented, unlike the company constitution that can be amended through majority vote.
Therefore, they can better impede changes to a shareholder agreement affecting their rights, as compared to changes to the company constitution. Note that if you are your company’s only shareholder, you need not have a shareholders’ agreement.
When Should You Create a Shareholders’ Agreement?
A shareholders’ agreement should be create before or during company incorporation as it ensures the company governance’s clarity and certainty. Misalignment problems may occur when there are multiple shareholders.
For example, shareholders may have different views on issues like exit strategies, company management, and dividend policies. The earlier the shareholder agreement is drafted, the earlier the shareholders are aligned, which will help shareholders determine whether they should buy into the business.
As the company advances, expectations between shareholders are likely to change, and having a well-drafted agreement with dispute resolution clauses early can act as a good reference tool to resolve differing opinions, hence preventing unnecessary legal action between the shareholders or against the business.
What Terms Should a Shareholders’ Agreement Have?
A shareholder agreement’s content depends on the needs of the parties. Some parties prefer a simple agreement while others would rather have a detailed and concise one that states every single obligation in the company’s operations.
Although shareholders usually have the ability to determine the terms of the agreement, its extent depends on the individual shareholders’ bargaining power, so not all shareholders may have a say in the agreement’s content.
Here are the mandatory terms that a shareholders’ agreement should include:
| Term | What it Means |
|---|---|
| Company’s Business | This is a clause that clearly states the business of the company, therefore preventing major changes after incorporation. Shareholders will not want the business significantly altered from its original conception to safeguard themselves from unexpected risks. |
| Company’s Shareholding | This clause details the quantity and type of shares that the company shareholders hold. |
| Share Capital and Rights | This clause describes a company’s share capital, which is the amount invested in the company and the types of rights attached to the shares. |
| Company’s Management | This clause mentions the number of directors comprising the Board and the way in which shareholders can appoint the Board. It may also restrict the types of decisions that the Board can make. |
| Restriction on Shares Transfer | This clause restricts the transfer of shares unless approval from other shareholders has previously been obtained. This restriction is needed because the Companies Act needs private companies to restrict the transfer of their shares. |
| Investment Return | This clause notes how the company’s founders and investors can recover their investment and explains the company’s dividend policy. |
| Valuation Method | This clause specifies how shares should be valued when a share sale happens. |
| Drag-along Rights/Tag-along Rights | Drag-along rights allow majority shareholders to compel minority shareholders to sell their shares if the company faces a sale. On the other hand, tag-along rights protect minority shareholders by allowing them to sell their shares together with the majority shareholders. |
| Buyout Options | Buyout options can be activated if the company or other shareholders might want or need to buy out a particular shareholder’s stake. Buyout clauses can stipulate the method of valuation for the shares, timelines for the buyout, and payment terms. |
| Exit Method | This clause specifies how founders and investors can sell their shares. |
Aside from the required terms, other terms may be included, if needed:
| Term | What it Means |
|---|---|
| Compulsory Shares Purchase | If there is an agreement that stipulates a shareholder must sell his shares to the remaining shareholders in certain situations, such as during a bankruptcy, death, or a breach of an obligation in the shareholders’ agreement, this clause allows the company to continue maintaining the shares, therefore protecting its interest. |
| Access to Company Records | This clause specifies what the company records entail and how they will be kept. It may also vest shareholders with the power to review company records whenever they want. |
| Right of First Refusal | Certain shareholder agreements allow shareholders to have the right of first refusal when someone wants to sell their shares. It provides shareholders with the right to buy some or all shares being sold before they are sold to others. |
| Confidentiality | This clause stipulates the types of information that should be kept confidential, such as client lists, business plans, financial information, and trade secrets. It can also detail the types of obligations that are needed to ensure that its secrets are preserved. |
| Loyalty | Non-solicitation and non-competition clauses prevent shareholders from leaving and incorporating a rival company if they are parties to the shareholder agreement. |
| Governing Law and Jurisdiction | This clause stipulates which country’s law will be used to interpre the terms of the shareholders’ agreement. It is essential especially if the agreement has a cross-border element. |
Executing a Shareholders’ Agreement
If the agreement is only between the shareholders, only the shareholders need to sign it. If the agreement occurs between the company and its shareholders, the company, represented by its directors or authorised staff, must also sign the agreement, aside from its shareholders.
Let Our Experts Guide Your Shareholders’ Agreement
In Singapore’s fast-paced and competitive business landscape, having a comprehensive and clear shareholders’ agreement is essential.
Every business is unique, and its shareholders’ agreement should reflect that individuality. It is not only about anticipating and mitigating challenges but also about fostering an environment where everyone’s interests align for the collective success of the enterprise.
Contact our team at InCorp to find out more about drafting your shareholders’ agreement!
FAQs about Shareholder's Agreement in Singapore
- A shareholders' agreement in Singapore is a legally binding document that outlines the rights, responsibilities, and obligations of shareholders in a company.
- The shareholders’ agreement is designed to govern the relationship between shareholders, ensure the smooth operation of the company, and protect the interests of all parties involved.
- Some clauses include the right of first refusal, drag-along rights, and valuation methods.
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