Learn more about Shareholders Agreement in Singapore
A shareholder agreement is a document that specifies how the firm will be handled to ensure its smooth running. This type of agreement typically address a wide range of topics, including the companies’ business strategies, dividend policies, capital structure, and board makeup. It also specifies the rights, powers, and obligations of the various stakeholders, including the company’s shareholders, directors, and investors. Shareholders, for example, may be given the right to appoint the Board of Directors (“the Board”) through a shareholder agreement, while directors may be given influence over specific management choices. Our other articles will teach you more about shareholder rights and obligations. This contract is not required of shareholders. As a result, stockholders should only enter into one freely.
It is not necessary for all shareholders to sign the contract. It can also be signed by only the following individuals:
➤ Among some shareholders
➤ Among shareholders and the company
A shareholders agreement, for example, could be a way for select shareholders to enter into private agreements amongst themselves, such as non-compete agreements and contracts in which one shareholder has the right to purchase shares from another shareholder. Only the shareholders involved in such arrangements are required to sign the contract in such situations.
If, on the other hand, the shareholders and the firm engage into a shareholder contract, the company and the shareholders can directly enforce the provisions of the agreement against one another.
However, including the company as a party to the agreement has the disadvantage of requiring the company’s consent if the contract needs to be altered, and securing such consent may be difficult. This is due to the fact that if the corporation is a party to the agreement, the permission of a larger number of parties may be necessary as opposed to a smaller, determinable pool of shareholders.
For example, because the company is a party to the agreement, the consent of the company’s Board members may be required, even if the Board is not actively involved in the shareholder contract.
Why might you need a shareholders agreement?
To augment the company constitution, a shareholders contract might be employed. This type of agreement is especially effective when:
➤ The corporation follows the Accounting and Corporate Regulatory Authority's Model Constitution template (ACRA)
➤ The shareholders want to insert particularly specific or one-of-a-kind clauses in their agreement
This is due to the Model Constitution containing only broad provisions pertaining to a company’s governance. A shareholders agreement, on the other hand, has more prescriptive clauses that address the company’s specific business requirements as well as the shareholders’ concerns.
From the perspective of a minority shareholder, it may be preferable to have a separate shareholders contract rather than including its requirements into the company constitution.
This is due to the fact that, unlike the company constitution, which may be modified by majority vote, a shareholders agreement can only be changed with the approval of all parties to the contract.
Minority shareholders may thus be able to reject changes to the agreement that affect their rights more effectively than changes to the corporate constitution.
It is important to understand that if you are the lone shareholder of your company, you do not require a shareholders contract.
Benefits of having shareholders agreements
The following are the advantages of having shareholders agreements:
➤ Unlike the business constitution, a shareholder agreement is not subject to public scrutiny
➤ A shareholder contract might spell forth regulations to govern areas not covered by the company constitution
➤ A shareholder agreement can be utilized to attract investors by increasing investor protection and offering special investor rights
➤ By prescribing confidentiality and non-competitive responsibilities, a shareholder agreement can be utilized to boost the company's competitiveness or to maintain a first-mover advantage
➤ Minority rights can be safeguarded via a shareholder contract. For example, the agreement could include a condition requiring the presence of a minority shareholder to form a quorum at meetings. This clause could protect them from having their shareholdings diluted
Limitations of having shareholders agreements
Shareholders who are not parties to the agreement are generally not able to enforce a contract like this one. It binds solely the contracting parties, as opposed to the company constitution, which binds all of the business’s shareholders.
This means that unless the provisions are likewise written into the company constitution, if the company is not a party to the contract, there is often no mechanism to compel all of the company’s shareholders to comply with the contract’s terms.
To be bound by the conditions of the agreement, new shareholders must sign it as well.
How the shareholder agreement is to be completed/executed?
If the shareholders agreement is between the shareholders, the contract must be signed only by the shareholders.
If the agreement is between the company and the shareholders, the firm (as represented by its directors or authorized staff) must sign it as well as the shareholders.
When is the best time to draft a shareholders agreement?
It is strongly advised that the shareholder contract be established before to or at the time of incorporation of your company to provide clarity and certainty of the firm’s governance. Misalignment difficulties are more likely to emerge when there are many stockholders.
Shareholders may hold opposing viewpoints on matters such as dividend policies, exit strategies, and corporate management. The faster this agreement is drafted, the sooner the shareholders will be on the same page, which will enable shareholders decide whether or not to invest in the company.
Furthermore, as the firm progresses, shareholder expectations are sure to shift, which may lead to disputes. When this occurs, having a well-drafted shareholders agreement with dispute resolution procedures in place as soon as possible will serve as a valuable reference tool to settle any differences of opinion, thereby preventing unnecessary legal action among shareholders or against the firm.
It is also recommended that you hire a corporate lawyer to help you review or create your shareholders contract to ensure that it is thorough and that all shareholders’ interests are effectively protected.
What terms should a shareholders agreement contain?
The contents of shareholders contracts are determined by the needs of the parties. Some people prefer a short and transparent agreement, while others want to delve into depth and spell out every obligation in the company’s operation.
While shareholders generally have the flexibility to dictate the terms of the agreement, the level of such freedom is determined by the individual shareholders’ negotiating strength. As a result, not all stockholders may have a say in the contract’s contents.
A well-drafted shareholders agreement would often include the following key terms:
Term
Definition
Business of the company
A provision specifying the company's business clearly bans any major changes to the business after the company is incorporated. This clause is helpful because shareholders would not want the business to be drastically transformed from its initial design in order to protect themselves against unforeseen dangers
Shareholding of the company
This section defines the number and type of shares (e.g., ordinary or preference shares) held by the company's shareholders
Share capital and rights
This section specifies a business's share capital, which refers to the money invested in the company, as well as the rights associated to the shares
Restriction on transfer of shares
These agreements prohibit the transfer of shares unless prior approval from other shareholders is obtained. The Firms Act compels private companies to limit the transfer of their shares, therefore such a restriction is required
Management of the company
This clause specifies the number of directors who will serve on the Board and the manner in which the Board will be appointed by the shareholders. This phrase may also limit the types of choices that the Board may make
Return of investment
This clause details the company's payout policy as well as how the founders and investors might reclaim their investment
Valuation method
These clauses specify how shares should be valued in the event of a share sale
Exit route
This section describes how investors and founders can sell their stock. When the majority shareholders agree to sell all company shares, for example, a drag-along rights clause may be included. This drag-along rights clause could also include the percentage of shares required to compel minority shareholders to sell their shares on the same terms as the majority shareholders
In addition to the fundamental phrases listed above, the parties’ needs may necessitate the inclusion of the following terms:
Term
Definition
Right of first refusal
When someone wants to sell their shares, some shareholders agreements provide them the right of first refusal. This clause gives shareholders the ability to purchase some or all of the shares being sold before they are sold to others
Compulsory purchase of shares
There may be agreements requiring a shareholder to sell his shares to the other shareholders in specific circumstances, such as bankruptcy, death, or a breach of an obligation under the shareholder's agreement. This clause allows the firm to keep the shares and thereby protects the company's interests. In the absence of this clause, any shares held by, say, a deceased shareholder, may be bequeathed to his immediate family members under the shareholder's will, resulting in an outsider acquiring a major shareholding in the company and being able to dictate the firm's affairs
Access to company records
This clause specifies what the company documents (e.g., meeting minutes, company contracts, and accounting records) entail and how they are to be preserved. Furthermore, this clause may give shareholders the authority to scrutinize company records as they see fit
Intellectual property rights
These clauses ensure that all intellectual and industrial property rights associated with the company are allocated to the company or any person designated by the company
Loyalty
Non-competition and non-solicitation clauses prevent shareholders from leaving and launching a competing company as long as they are parties to the shareholders agreement. Shareholders who agree to such terms promise not to solicit the company's workers, suppliers, or clients, or to participate in any business that competes with the company's operation
Confidentiality
This clause specifies the categories of information that must be kept private. Client lists and details, trade secrets, business plans, financial information, and personnel lists and details are examples. It might also specify the types of requirements required to ensure the confidentiality of the company's secrets. For example, a clause could be introduced requiring a shareholder to get the Board's prior approval before disclosing any private information
Governing law and jurisdiction
The governing law provision specifies which country's law will be utilized to interpret the terms of the shareholder's contract. A clause like this is crucial, especially where there is a cross-border component to the agreement or many international parties are engaged. The jurisdiction clause, on the other hand, defines which country's courts should hear a dispute. Including a jurisdiction provision helps to avoid disagreements about where a matter should be litigated
Where should you keep your shareholders agreement?
Shareholders contracts are internal corporate documents that must be followed. A copy of this agreement, along with other official corporate records and documents, should be kept in the firm’s minute books. Because shareholders contracts are highly sensitive, access to them should be controlled.
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