Singapore’s Shareholders Agreements Explained
How to start your business right in Singapore? Apart from the business plan and the company incorporation process, a good shareholders agreement is crucial to get your business started. While many might think that a shareholders agreement is an unnecessary cost to business, it is crucial to a business as it keeps everyone on the same page and protects every shareholder at the same time.
What is a shareholders agreement?
As the name implies, shareholders agreement is an agreement that governs the relationship between shareholders and it generally outlines the standard to the rights and obligations of shareholders together with the ground rules in company management and business operations. It supplements the company constitution as it spells out the terms and conditions, creating an understanding among various business parties. The scope of a shareholders agreement can vary due to different circumstances.
The following parties could enter into the shareholders agreement:
- Some of the shareholders;
- All of the shareholders; and
- Shareholders and the company.
Why do you need a shareholders agreement?
Having a shareholders agreement is a great and cost-effective way of minimizing any issues that may arise later on with an established framework for the operation and management of the company, providing greater certainty for the parties involved. As such, a streamlined and well-drafted shareholders agreement can help to eliminate disagreements between shareholders and make sure that everyone is on the same page.
Unlike the company constitution, a shareholder agreement is not open for public inspection. The shareholders agreement is a great way to manage and maintain the relationship between shareholders as it effectively minimizes disputes, reduces uncertainties, and assure investors with the evidence of stability in the business.
The benefits of having a shareholders agreement
- It maps out the clear structure – Shareholders agreement outlines the structure of a company, from the financial management, members of the Board, to the company management.
- It minimizes uncertainty – In the event of uncertainties (death, disability or retirement of a shareholder), a shareholders agreement will keep the company to run smoothly with a well-drafted exit strategy for the share’s transfer in the business.
- It reduces disputes and conflicts- Shareholder’s agreement outlines the different circumstances of disputes and possible resolutions.
- It maintains the investor relationship –Provisions relating to management rights and investors rights are always included in a shareholders agreement. This is to ensure that the rights of the venture capitalist (if any) are protected.
Limitations of shareholders agreements
Shareholders agreement has its limitation, too. Among many other things, any shareholders who are not parties to the agreement do not need to comply with (or are not subjected to) the terms as in the agreement, unless the terms are incorporated into the company constitution.
In other words, a shareholder agreement does not bind all the shareholders of the company but the contracting parties (the company constitution binds all shareholders in the company).
What terms should a shareholders agreement contain?
In general, the contents of shareholder agreements depend on the needs and requirements of the parties to the agreement. A properly drafted shareholder agreement usually contains the following essential terms:
- Management of the company: This includes the ground rules and policies of the functions of the company, how the corporation will be set up, managed, and run.
- Loyalty and confidentiality: What kinds of obligations are necessary to ensure the company’s secrets are preserved?
- Return of investment: What is the company’s dividend policy? How can the founders and investors recover their investments?
- Valuation method: How will the shares be valued in a share sale?
- Exit route: A well-written shareholders agreement will set out for different exit strategies in the event that the shareholders can no longer be in business together.
Having a well-written shareholders agreement will bring a multiplicity of benefits to a business. If you need any advice or assistance in preparing a shareholders agreement for your business, please do not be hesitate to contact us.