Simplifying Shareholders Agreements
More than 97% of the businesses in Singapore are made up of Small & Medium Enterprises (SMEs).
- The need for shareholders’ agreements among SMEs is a significant barrier that frequently causes expensive and time-consuming disagreements between business owners.
- If left unresolved, it may eventually result in a growing and successful company split.
- The expansion of businesses is also hampered by a need for a Shareholders’ Agreement since investors need more certainty.
Table of Contents
1. What Is A Shareholders Agreement?
- A Shareholders’ Agreement is a legally binding document that outlines the rights, responsibilities, and obligations of the shareholders in a company.
- It serves as a roadmap for how the company will be managed and operated, as well as how important decisions will be made.
2. Benefits Of A Shareholders Agreement
Key benefits of a Shareholders’ Agreement include:
- Provision of Clear Structure
- When starting a company, it is essential to have a clear structure.
- The Shareholders’ Agreement will outline the structure of the company, how it is financed, who are the members of the Board, how the company is to be managed, and any other relevant details.
- This can help prevent disagreements and ensure the company runs smoothly.
- Minimising Uncertainty
- For any business with multiple shareholders, a Shareholders’ Agreement can help minimise the uncertainty that can come with the death, disability or retirement of a shareholder.
- A properly drafted Shareholders’ Agreement would provide a proper mechanism for transferring shares in the business.
- This helps keep the company running smoothly.
- Confidentiality
- Shareholders may have different business interests, some being more active than others in the company.
- Confidentiality clauses in Shareholders Agreements help protect the company from releasing commercial information to competitors or outsiders.
- Investor Relationship
- When a company looks for funding, it often turns to venture capitalists. These investors are willing to put up money in exchange for a piece of the company.
- The Shareholders Agreement, in such cases, spells out the rights and responsibilities of each party, including those of the management team and the investors.
- One of the primary purposes of these provisions is to ensure that the rights of venture capitalists are protected.
- If things don’t go as planned, the investors can vote to remove the management team, sell the company, or take any other necessary action.
- Having Shareholders’ Agreements in place, the investors and the management team can rest assured that their interests are being looked out for.
3. Key Provisions In A Shareholders Agreement
A properly drafted Shareholders’ Agreement, with sound legal principles, should contain the following key provisions:
- Legal Obligations of Parties
- Define each party’s specific duties and responsibilities.
- This can help minimise the likelihood of future disputes between shareholders.
- Financial Obligations of Parties
- Define the required investment amounts for each party in the business, along with their respective financial responsibilities and accountability.
- Board Composition and Appointment
- The composition and appointment process of the Board of directors should be clearly defined to ensure that individuals with the right qualifications are entrusted with guiding the company’s strategic direction.
- The provision can specify the number of directors, the method of election or appointment, and any specific qualifications or restrictions.
- Decision-Making and Voting Rights
- A well-established decision-making process and allocation of voting rights is crucial to prevent imbalances of power and conflicts.
- This provision can outline the decision-making procedure, detail the voting rights of different classes of shares or individual shareholders, and establish requirements for quorum in important decisions.
- Non-Compete & Confidentiality
- To protect the company’s intellectual property and maintain a fair business environment, provisions should be included to restrict shareholders from engaging in activities that may harm the business.
- These provisions can outline non-compete clauses and confidentiality obligations to safeguard trade secrets and proprietary information.
- Distribution of Dividends
- Clearly addressing how profits will be distributed among shareholders is vital to prevent disagreements.
- This provision can specify the procedure for declaring dividends, determine the frequency of dividend payments, and establish the priority and proportion of distributions to different shareholders.
- Dispute Resolution Mechanisms
- Including provisions for dispute resolution can save time, money, and potential damage to relationships.
- These provisions can outline alternative methods for resolving disputes, such as mediation or arbitration, ensuring that conflicts are resolved fairly and efficiently.
- Transfer of Shares
- Defining the ownership structure and outlining the process for transferring shares is essential.
- This provision sets guidelines for the sale, transfer, or issuance of shares, ensuring that any changes in ownership are regulated and approved by all parties involved.
4. Essential Considerations When Creating A Shareholders Agreement
Define the purpose and objectives of the agreement. This includes specifying the goals and vision of the company, as well as the roles and responsibilities of each shareholder.
The issue of ownership and shares should be thoroughly addressed. This involves determining the initial allocation of shares, as well as any future possibilities for issuing or transferring shares.
Seek legal advice when creating a Shareholders’ Agreement. Each business is unique, and a well-crafted agreement should reflect the specific needs and circumstances of the company.
Working with an experienced corporate lawyer to draft a tailored Shareholders’ Agreement is a vital step towards securing success and protecting the interests of all shareholders.
Whether you’re a small startup or an established company, a well-drafted Shareholders’ Agreement can provide peace of mind. By creating the Shareholders’ Agreement now, you can avoid costly and time-consuming disputes later.
Editor’s Note: This article was originally published in November 2022 and has been completely revamped and updated for accuracy and comprehensiveness.
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