Introduction
A shareholders’ agreement is a cornerstone private agreement between two or more shareholders of a company, and which serves to govern the legal relationship amongst them. Depending on the intention and objectives of the parties, the company may or may not be a party to the agreement. Broadly, this agreement sets out the rights and obligations of the parties, and which are typically in addition to those provided in the constitution (formerly known as the memorandum and articles of association) of the company.
Regardless of whether the company is an established conglomerate or a budding startup, a well-drafted shareholders’ agreement should clearly set out the legal obligations of the parties. This would mitigate the risks of disputes and foster transparency.
In this article, we will delve into the key legal purposes of a shareholders’ agreement and provide an in-depth analysis of the typical clauses commonly found in such agreements.
The key legal purposes of a shareholders’ agreement include:
- Protecting Shareholder Rights
One of the foremost purposes of a shareholders’ agreement is to safeguard the rights and interests of shareholders. A well-drafted shareholders’ agreement would, amongst others, provide for: (i) the object and scope of business which the company would conduct; (ii) the composition and appointment of the board of directors; (iii) the decision-making parameters relating to each of the board of directors and each class of shareholders; (iv) voting rights of the board of directors and each class of shareholders;
(v) the information rights in relation to each class of shareholders; (vi) the dividend policy of the company; and (vii) the proposed terms of exit by each class of shareholders, for instance in a sale of the company or an initial public offering.
- Setting the Framework for Management
A well-drafted shareholders’ agreement provides clarity on how the company should be managed and by whom. It can define the roles and responsibilities of directors, set performance benchmarks, and establish procedures for appointing and removing key personnel.
In particular, the concept of ‘reserved matters’ can be built into a shareholders’ agreement. The purpose of having a list of reserved matters set out in the shareholders’ agreement is to provide for certain corporate matters to require the approval of certain classes of shareholders and the approval thresholds required for each of these matters.
Depending on how the list of reserved matters is structured, it can better protect the interest of certain parties. For example, a particular class of shareholders could benefit where the assent of a super- majority of a particular class of shareholders is required, or the minority shareholders could benefit where the minority shareholders have veto rights.
Experienced corporate lawyers with strong business acumen would be able to guide their clients in establishing the optimal framework for management and in drawing up a list of reserved matters tailored for the specific needs of the company and its shareholders.
- Agreeing on Share Transfers and Exit Options
Shareholders who go into business ventures together would typically contemplate and pre-empt their future exit options, including transferring their shares to existing shareholders and third parties.
A well-drafted shareholders’ agreement will include agreed terms such as: (i) whether there should be any restrictions on the sale of shares by existing shareholders (e.g. right of first refusal); (ii) the process of sale of shares by existing shareholders; (iii) the manner in which the sale shares should be valued (e.g. by agreement or independent valuation); (iv) whether the minority shareholder(s) have the right to tag-along with the majority shareholder(s) in selling their shares to a purchaser (i.e. tag-along rights); and (v) whether the majority shareholder(s) have the right to drag the minority shareholder(s) along in a sale of shares to a purchaser (i.e. drag-along rights).
- Enhancing Confidentiality
Confidentiality is often paramount in the business world. These agreements can include provisions to protect sensitive information and trade secrets to minimize the risk of loss of intellectual property and to protect competitive advantages.
- Setting Clear Dispute Resolution Mechanisms
Anticipating conflicts is essential in any business venture. Typically, a shareholders’ agreement would include detailed dispute resolution mechanisms, such as mediation and arbitration.
In situations of deadlock (especially in a 50:50 joint venture) and default, a well-drafted shareholders’ agreement would also include dispute resolution mechanisms such as put and call options.
Having such mechanisms would facilitate prompt and efficient resolution of conflicts, thereby preventing costly litigation.
- Conclusion
Unlike the constitution, there is no legal requirement under Singapore law to register the shareholders’ agreement and make it available for public inspection. Accordingly, shareholders’ agreements are seldom publicly registered because the parties generally desire to keep the terms of their shareholders’ agreement private.
With a clear understanding of the legal purposes of a shareholders’ agreement and the typical clauses it contains, corporate entities and their shareholders who enter into such an agreement would thus be able to better navigate the corporate landscape with confidence, thereby increase the probability of success of their joint ventures.
In most cases, we would highly recommend shareholders of a company to enter into a shareholders’ agreement. A well-structured agreement would provide the parties additional clarity and certainty in relation to their rights and obligations vis-à-vis one another, and would serve to protect shareholders’ rights, promote effective management, clarify exit rights, and provide mechanisms for conflict resolution.
Our firm specialises in drafting bespoke shareholders’ agreements to meet the unique needs of our clients.
The author, Waltson Tan, is a corporate lawyer based in Singapore. He is qualified as an advocate and solicitor in Singapore and has more than seven years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Prior to joining the firm, he practised at a leading international law firm, which was the second largest law firm in the United States and one of the ten largest in the world.
