What is a Shareholders Agreement?

A shareholders agreement is a legal document setting out the rights and obligations of the shareholders in a company. Shareholders agreements are often used in private companies or joint ventures. Unlike the company constitution, the shareholder agreement is not mandatory under the Companies Act. The Companies Act is the main governing legislation for companies incorporated in Singapore. If there is no shareholders agreement, the relationships of shareholders as between themselves and with the company are governed by the constitution or articles of association of the company.

Does My Company Need A Shareholders Agreement?

Shareholders who want more flexibility in regulating their relationship should consider creating a shareholder agreement. Because the shareholders agreement is a private contract, the usual contractual principles will apply. Like an ordinary contract, the agreement may be varied with the consent of all contracting parties, and not by a three-quarter majority as required for company constitutions under the Companies Act.

In addition, because the shareholders agreement need not be registered with the Registrar, confidentiality as to the terms of the parties’ participation in the company is preserved.

Finally, parties may also include into the shareholders agreement terms as they deem fit, so the agreement may regulate a broad range of matters, including funding, management and voting arrangements, reserved matters which require unanimous or supermajority consent of shareholders, dispute resolution and obligations of confidentiality.

Notably, the shareholders agreement only binds the shareholders who are party to it. Subsequent shareholders are not bound by its terms unless they specifically sign it.

What Should I Include in the Shareholders Agreement?

The general questionnaire structure is below. If you would like to request my assistance in drafting a shareholders agreement, you can write to me at ronald.wong@covenantchambers.com with your responses to the questions below.

1. Who are the parties involved?

a. Identify the parties in detail. Specify full names, registration numbers (NRIC/FIN/UEN), registered/postal addresses and contact details.

b. Shareholders can be individuals or corporate entities such as private limited companies.

2. What is the shareholding of the company?

a. Break down the shareholding of the company. Specify full names, quantity of shares subscribed by the named shareholders, type of shares subscribed (Ordinary or Preference Shares) and price of each share.

b. Identify the total number of Ordinary Shares (and Preference Shares, if any) comprising the share capital. Specify the number of votes that each Ordinary Share (and Preference Share, if any) carries at a shareholders’ meeting. Unless the company constitution determines otherwise, each share carries one vote, pursuant to Section 64 of the Companies Act.

c. Note: Ordinary shares are the most common class of shares in companies. They grant their owners voting rights. They also entitle the shareholders to dividends.

d. Note: Preference shares are shares that grant their owners preferential rights over ordinary shares. These rights often relate to dividend distributions, liquidation preference, and can be used to reward founding members of the company for their greater contributions or allotted to investors in subsequent funding rounds. Preference shares may be voting or non-voting. Any preferential rights must be set out in the company constitution pursuant to Section 75 of the Companies Act. It is common practice that new classes of preference shares are issued for each funding round, e.g. Series A Preference Shares, Series B Preference Shares. The rights and terms of each class of preference shares may differ depending on the terms of that investment round.

e. Note: Section 70 of the Companies Act provides that a company limited by shares may, if authorised by its constitution, issue preference shares that are liable to be redeemed (redeemable preference shares). Holders of such shares have a right to repayment of their capital either at a fixed date or at the option of the company, subject to limitations under Section 70.

3. Are there restrictions on share transfers?

a. Assuming the company is a private limited company, do consider placing restrictions on the transfer of shares in some way (c.f. Section 18 of the Companies Act). This will be incorporated as a term in the shareholder agreement.

b. The right to transfer shares can be restricted for example by:-

i. Pre-emptive rights or right of first refusal: giving existing shareholders a right to have any shares offered to them first before they can be transferred;

ii. Board consent: requiring the board of directors of the company a discretion to consent to register a transfer;

iii. Tag along rights: when a selling shareholder (usually the majority shareholder) wants to sell all his shares to a third party, the other shareholders may require the selling shareholder to procure that the third party purchaser also purchases their shares on the same terms. This ensures that the remaining shareholders are not left hanging with a majority shareholder they have no relationship with;

iv. Drag along rights: when a selling shareholder (usually the majority shareholder) wishes to sell all his shares to a third party, he can require the other shareholders to sell all their shares to the third party purchaser on the same terms. This allows the majority shareholder to offer to the third party purchaser to purchase the entire shareholding of the company;

v. Russian roulette: a shareholder (A) may serve notice on the other shareholder (B) offering to transfer all A’s shares in the company to B at a price specified by A. B must accept A’s offer and buy A’s shares at the stated price or must sell all his shares to A at the same price per share. This is typically found in joint ventures;

vi. Compulsory transfers: upon the occurrence of a specified event, a shareholder must transfer all his shares to the other shareholders or a third party purchaser approved by the board of directors. E.g. bankruptcy or insolvency of the transferring shareholder, death, loss of mental capacity, breach of material conditions or terms of the shareholders agreement. Typically, under such circumstances there will be a share valuation mechanism to determine the transfer price;

vii. Restrictions on transferees: stipulating to whom shares may be transferred (such as to the exclusion of banks and foreigners).

4. Who is managing the company?

a. Identify who will be appointed as director(s), Chairman of the board of directors and managing director(s). Specify how director appointments will be made. For example, certain shareholders can be entitled to appoint a director to the board. Note that every company must have at least one director whose usual place of residence is in Singapore, pursuant to Section 145 of the Companies Act.

b. Note: Any regulations relating to a company’s internal governance must be contained in the company constitution (and not only in the shareholder agreement) to be effective against all members of the company. Unless the constitution otherwise provides, a company may appoint a director by ordinary resolution (simple majority) passed at a general meeting, pursuant to Section 149B of the Companies Act.

5. How will decisions be made?

a. State how the board of directors should make decisions. Consider whether decisions should be made informally or in a meeting, the number of votes required to pass a board resolution, whether the Chairman of the board has special voting powers and how a deadlock at the board level will be broken.

b. Specify which matters will require the ordinary resolution, special resolution or unanimous consent of the board of directors or the shareholders. While Section 152 of the Companies Act provides public companies with a overriding statutory right to remove directors by ordinary resolution, there is no equivalent statutory provision for private companies. These matters must be provided in the company constitution.

c. Typically, shareholders agreements will have certain reserved matters which certain shareholders or nominee directors can veto decisions on. E.g. fundamental change in business, capital expenditure of more than a certain stipulated amount.

d. Tip: It may be helpful to specify that the managing director will have exclusive control over certain management decisions. This may allow the company to operate business more smoothly without having to seek the consent of the board of directors for all matters.

6. Other common matters addresses

Shareholders agreements typically include standardised clauses which are often agreed with little or no negotiation. It is useful to include clauses like the following:

a. Access to company records and information: What types of information and records of the company which shareholders are entitled to access;

b. Confidentiality: Which company documents must be protected from public knowledge;

c. Intellectual property rights: Who owns intellectual property rights arising from acts performed for the company;

d. Non-competition and non-solicitation: How each shareholder is barred from using the company’s property, competing with the company or soliciting the company’s clients;

e. Termination and Events of Default: When and how the shareholder agreement can be terminated and what are events of default which trigger termination;

f. Representations and warranties: Any statements of past or present fact made by parties to the agreement;

g. Overriding agreement: That in the event of any inconsistency between the shareholder agreement and the company constitution, the shareholder agreement should prevail;

h. Governing law and jurisdiction: That the law to be applied in interpreting the agreement and in determining any dispute between the parties shall be Singapore law, and whether such disputes should be referred to arbitration or court litigation. Court litigation is public whereas arbitration is private and confidential.

(This note was written with the assistance of Monica Heng.)