Planning to establish a business in Singapore? Then paying attention to several legal aspects is important! One aspect that is often overlooked is the shareholders’ agreement. A shareholders’ agreement in Singapore is essential to ensure smooth business operations and protect shareholder interests. Find out what it is and why it is important in our comprehensive explanation below!
What Is a Shareholder Agreement?
A shareholder agreement is a binding contract that clearly defines the rights, duties, and obligations of the shareholders. Shareholder agreements often cover key areas such as voting rights, share transfers, dispute resolution, and governance. With shareholder agreements in place, it will help to ensure smooth governance and prevent disputes in the company.
Relevant Points in the Shareholders' Agreement
When creating the shareholders agreement, below are the main important points to consider:
- Governance: division of corporate social responsibility or society;
- Transfer of shares: how a shareholder makes to sell his shares and preference in the acquisitions;
- Solution of deadlock: solve cases of divergence between the parties.
These three points determine how the agreement should be made. Everything must be included in the contract, including in the case of another new person joining the company. It is also important to note, that these are some of the characteristics of the shareholder's agreement:
- The shareholder's agreement is a legal business formed by the concurrence of wills of two or more parties.
- Only shareholders can be party to the agreement, and their purpose may only be to exercise the right to vote.
- This agreement only creates links between the parties and not for third parties.
- This instrument serves to harmonize the wishes of shareholders especially when it comes to corporations.
- Through the shareholder's agreement, minority investors can form a block and obtain a number of shares of the company so that they do not have to obtain funds from outside.
- The contract itself is a protection within the most varied types of companies in Singapore to control based on agreements and the sale of shares. The exercise of voting rights, in turn, is regulated and shareholders may not invoke to exonerate themselves from the exercise of the right to vote.
What Are the Types of Shareholder Agreement?
Understanding the different types of shareholders' agreements is crucial for structuring the relationships within a company. These agreements define the rights and obligations of shareholders and can involve either a select group of shareholders or include the company itself. Not all shareholders must sign the same agreement, and depending on the scenario, other parties can also be bound by these contracts. Below are two key types of shareholders' agreements:
Agreement Between Shareholders
This type of agreement is used when only certain shareholders wish to establish specific private arrangements among themselves. In such cases, only the participating shareholders need to sign the agreement. Common clauses in these agreements include:
- Non-Compete Agreements: These clauses prevent shareholders from engaging in businesses that compete directly with the company, protecting its market position.
- Share Acquisition Rights: Shareholders may include provisions for the right to purchase shares from other shareholders, either under specific conditions like retirement, resignation, or sale of shares. This ensures that control of the company remains within a preferred group of shareholders.
Since only the involved shareholders are bound by these agreements, they offer flexibility and can be easily adjusted as circumstances change without affecting the entire shareholder base.
Agreement Between Shareholders and the Company
In this type of agreement, both the shareholders and the company are parties to the contract. The inclusion of the company allows for certain provisions that are directly enforceable by the company or against it, creating a more binding and structured relationship. Some key points in this type of agreement include:
- Enforceable Terms: The company can take legal action to enforce certain terms, such as voting rights, dividend policies, and restrictions on share transfers.
- Comprehensive Coverage: This agreement helps align the interests of shareholders with the company, ensuring that the company’s long-term strategy is in line with shareholder expectations.
Shareholders' agreements can be tailored to the specific needs of the company and its shareholders. Whether structured between shareholders alone or with the company, these agreements play a vital role in ensuring smooth governance, protecting shareholder interests, and providing clarity on crucial matters like share transfers and company control.
Why Is Shareholder Agreement Important?
A well-drafted shareholders’ agreement ensures that the company’s operations run smoothly as it will define shareholders' roles, protect minority interests, and provide a mechanism for conflict resolution. Below are the crucial reasons why shareholder agreement is important.
Provide Clarity
A shareholders' agreement helps clarify the roles, responsibilities, and rights of each shareholder. It explicitly outlines how decisions are made, what voting rights each shareholder has, and how profits will be distributed. This clarity is essential for preventing misunderstandings and ensuring that everyone involved has a clear understanding of their obligations and entitlements.
Help Conflict Resolution
In any business, conflicts sometimes are inevitable —especially when they involve multiple stakeholders with different interests. A well-drafted shareholders’ agreement includes provisions for resolving conflicts, such as dispute resolution mechanisms like mediation or arbitration. It helps to establish a clear process for addressing disagreements and preventing any disputes that could harm the business.
Protection for the Shareholders
A shareholders' agreement is especially beneficial for protecting minority shareholders, ensuring they have a voice in the company’s decision-making process. Without such an agreement, minority shareholders may have limited influence over key business decisions.
Guide Ownership Changes
The shareholders' agreement provides clear procedures for changing ownership, such as buying or selling shares, transferring ownership in case of death or incapacity, or dealing with shareholders who wish to exit the company.
What Should Be Included in Shareholders’ Agreement?
When Should You Create a Shareholder Agreement?
A shareholders' agreement should ideally be created when the new shareholders are brought into the company, and before the company is being incorporated. It’s important to create them at the earliest stage of establishing the company, as creating a shareholders' agreement early on helps prevent uncertainty and legal issues as the business grows.
How to Break a Shareholder Agreement?
A shareholders' agreement can generally be terminated or amended if all parties to the agreement mutually agree to do so. The agreement itself usually contains termination clauses that outline the conditions under which it can be dissolved. These can include events like the dissolution of the company, a buyout, or breaches of the agreement by a shareholder.
The Bottom Line
If you would like to establish a business in Singapore, it is important to pay attention to crucial aspects such as shareholder agreement. They are vital for ensuring clarity, resolving conflicts, protecting shareholders, and managing ownership changes. By having shareholder agreement in place, your company can avoid the pitfalls that come from undefined roles and responsibilities, unplanned disputes, and unexpected changes in ownership.