Considerations for the necessity of a shareholder agreement:
While not mandatory, a shareholder agreement can greatly facilitate the smooth operation of a company or business. There are several reasons why a shareholder agreement may be required:
a) To supplement the company’s constitution.
b) To incorporate specific provisions among shareholders.
c) To address shareholder concerns.
d) To enable easy modifications by contracting parties.
e) To safeguard the interests of minority shareholders.
The advantages of having a shareholder agreement
A shareholder agreement offers the following benefits:
a) It is a confidential document for private viewing, unlike the Constitution.
b) It covers matters not governed by or addressed in the Constitution.
c) It can include various clauses, including non-competitive obligations that preserve a first-mover advantage.
d) It can incorporate investor rights and protections, thereby attracting additional investors.
e) It can protect the rights of minority shareholders.
f) It minimizes disputes and establishes procedures for resolving conflicts.
The disadvantages of having a shareholder agreement:
Although a shareholder agreement can be highly advantageous for shareholders, it does have certain limitations.
a) The shareholder agreement is not enforceable by all shareholders, unlike the company’s constitution. Only parties who are signatories to the agreement can enforce its terms.
b) New shareholders must sign the agreement to be bound by its provisions.
Typical provisions found in a Shareholder Agreement
There are no strict limitations on the provisions that can be included in a shareholder agreement. The content typically depends on the objectives of the shareholders who are parties to the agreement. Some common provisions include:
- The purpose and scope of the joint venture.
- The company’s capitalization, initial and ongoing financial requirements, and additional contributions from shareholders.
- Policies regarding profit sharing.
- Restrictions on the issuance or transfer of shares (including tag-along and drag-along provisions).
- Procedures for resolving deadlocks and defaults (such as put or call options), as well as termination provisions.
- Composition of the board of directors.
- Safeguards for minority shareholders (including veto rights on reserved matters and quorum requirements).
- Jurisdiction and governing law.
- Confidentiality and loyalty.
- Mechanisms for the compulsory acquisition of shares and access to corporate records.
- Procedures for refusing rights and exiting the company.
- Methods for valuing investments and achieving payback.
Actions to be taken in case of a breach of the shareholder agreement
A shareholder agreement is essentially a contract among the participating shareholders, and it falls under the purview of Contract Law in Singapore. Remedies for breach of the shareholder agreement include damages for the contractual violation. In certain cases, the court may exercise its discretion to award an injunction as a remedy for breaching the agreement. Shareholder agreements may also contain clauses stating that parties in breach of specific terms must sell their shares to non-breaching parties or buy shares from non-defaulting parties at pre-agreed prices.
The editorial team at singaporesecretaryservices.com
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