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Shareholder agreements in Singapore
20/01/2023
Shareholder agreements in Singapore are legal agreements between a company’s shareholders that outline each shareholder’s rights, responsibilities, and obligations. These agreements typically address issues such as the company’s management, the distribution of profits, the transfer of shares, and resolving disputes. They also often include buy-sell clauses, preemption clauses, reserved matters for directors and shareholders, drag-along rights, and tag-along rights.
Shareholder agreements are not legally required in Singapore. Still, they can help protect the interests of shareholders and provide a clear understanding of the expectations and responsibilities of all parties involved.
What is a Shareholder Agreement?
A shareholder agreement is a document that creates the foundations of how a company is to be managed.
Shareholder agreements typically cover several important issues, such as,
- the companies’ business plans,
- dividend policies,
- capital structure and
- board composition.
A shareholder agreement also establishes the rights, powers, and responsibilities of groups such as shareholders, company directors, and investors.
An example of a shareholder agreement in action would be where the shareholders are given the power to appoint the Board of Directors. Once appointed, those directors may be granted control over certain management decisions by the shareholder agreement.
Shareholder agreements are not legally required in Singapore, but our experts always recommend creating one to protect the interests of shareholders.
What are the advantages of a shareholder agreement?
A shareholder agreement can provide several advantages, including:
- Clarity of ownership: The agreement can clearly define the rights and responsibilities of each shareholder, including their ownership percentage and voting rights.
- Protection of minority shareholders: The agreement can include provisions to protect the rights of minority shareholders, such as the right to approve major decisions or the right to sell their shares.
- Transfer of shares: The agreement can include provisions for the transfer of shares, such as restrictions on who can buy shares or a right of first refusal for existing shareholders.
- Dispute resolution: The agreement can include a mechanism for resolving shareholder disputes, such as mediation or arbitration.
- Continuity of management: The agreement can provide for the company’s management in the event of the death or disability of a shareholder.
- Flexibility: Shareholder agreements can be tailored to suit the specific needs of the shareholders and the company and can be amended as the needs of the company change.
- In Singapore, a shareholder agreement is not open for public viewership, unlike the company constitution.
- A shareholder agreement can clarify and establish rules to govern matters not covered by the company constitution.
- A shareholder agreement can be used to protect the company’s IP, or to specify confidentiality and non-competitive obligations
Why do you need a shareholder agreement?
A shareholder agreement can be used alongside the company constitution to cover areas that may not have been clarified or previously mentioned. Shareholder agreements are beneficial when:
- The company uses the Model Constitution template provided by the Accounting and Corporate Regulatory Authority (ACRA); or
- The shareholders would like to include additional or specific clauses in their agreement.
The Model Constitution provided by ACRA only sets out broad provisions relating to a company’s governance. In contrast, a shareholder agreement has more detailed and relevant provisions that address the specific business requirements of the company as well as the concerns of the shareholders.
Shareholder agreements also provide an extra level of protection for a minority shareholder. This is because a shareholder agreement can only be altered with the consent of all parties to the contract. At the same time, the company constitution can be changed through a majority vote.
What are the limitations of a shareholder agreement in Singapore?
Like any legal document, a shareholder agreement in Singapore has certain limitations that should be considered. These include:
- Limited enforceability: A shareholder agreement is a contract between the shareholders and the company, and as such, it is only enforceable between the parties to the agreement. It cannot be enforced against third parties, such as creditors or potential investors.
- Public policy: Certain shareholder agreement provisions may be unenforceable if they are against public policy, such as provisions that restrict competition or prohibit the exercise of statutory rights.
- Governing law: The shareholder agreement should be governed by Singapore law, but it may need to be recognized or enforceable in other countries.
- Changes in law: A shareholder agreement may become obsolete or unenforceable if the laws and regulations change, so it’s essential to review the agreement regularly to ensure that it is still accurate and relevant.
- Dispute resolution: Disputes between shareholders may still arise despite a shareholder agreement, so it’s crucial to include dispute resolution mechanisms in the agreement, such as mediation or arbitration.
- Conflicting agreements: There may be other agreements, like the company’s constitution, which could conflict with the shareholder agreement. It’s important to review all agreements and reconcile any inconsistencies.
How should the Shareholder Agreement be executed in Singapore?
In Singapore, a shareholder agreement is typically executed by having all parties sign a physical or electronic copy of the agreement. The signature of all shareholders should be affixed to the agreement to make it legally binding.
As a shareholder agreement is a private contract, it does not need to be registered with ACRA. However, certain clauses that may be contained within a shareholder agreement will need to be registered with ACRA. Examples include:
- Rights and restrictions of shares
- The transfer of shares
- Any buy/sell provisions
When is the Best Time to Draft a Shareholder Agreement?
The best time to draft a shareholder agreement is when the company is first formed, before shares have been issued or significant business decisions have been made. This allows all shareholders to have input on the terms of the agreement and ensures that everyone is on the same page from the beginning.
Having a shareholder agreement in place early on can help to prevent disputes and misunderstandings down the road. It can also provide a clear roadmap for how the company will be managed and financed, which can be especially important for new companies.
However, it’s important to note that a shareholder agreement can also be established at any time after the company’s formation as long as all shareholders agree to the terms of the agreement. Even though it’s best to have it in place when the company is starting, it’s better to have one later than never.
What Terms Should a Shareholder Agreement Contain?
A shareholder agreement should contain various terms that outline the rights and responsibilities of the shareholders, as well as how the company will be managed and financed. Some key terms that a shareholder agreement should include are:
- Voting rights: outlining how shareholders can vote on important matters, such as the appointment of directors or major business decisions.
- Share transfer restrictions: outlining any restrictions on the transfer of shares, such as pre-emptive rights or rights of first refusal.
- Management and decision-making: outlining how the company will be managed, including the role and responsibilities of the board of directors and any other management positions.
- Financing: outlining how the company will be financed, including any restrictions on issuing new shares or borrowing money.
- Deadlock resolution: outlining how disputes between shareholders will be resolved, such as through mediation or arbitration.
- Buy-sell provisions: outlining the terms and conditions for buying and selling shares, including any restrictions on the transfer of shares and any rights of first refusal.
- Share Option Plan (also called ESOP): outlining the plan’s terms, including the process for granting options, the vesting schedule, and the exercise price. ESOP rights are also often clearly specified in an ESOP letter. This letter will be sent to all employees who are eligible for the scheme. (see our article on ESOP here)
- Dissolution: outlining the process for dissolving the company, including the buyout price for shares and the distribution of assets.
- Governing law and jurisdiction: outlining the governing law and jurisdiction governing the agreement.
- Arbitration / Mediation Clause: Such clauses will be used to solve disputes between the shareholders if and when they arise.
The specific terms will depend on the type of company, jurisdiction, and the particular needs of the shareholders. Our experts are available to help ensure your shareholder agreement is tailored to your situation.
How can Belaws help?
If you have a question about shareholder agreements in Singapore, please feel free to speak directly with one of our experts.
You can also view our Singapore incorporation services here.
Please note that this article is for information purposes only and does not constitute legal advice.
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