2 Ways to Remove a Singapore Company Shareholder ASAP
Removing shareholders as soon as possible from a company may be necessary for various reasons, such as:
- Disputes between majority and minority shareholders
- Disputes between directors and shareholders
- A particular shareholder who frequently acts in a disruptive manner
These disputes with shareholders may affect business operations, such as the inability to garner sufficient votes to pass resolutions at shareholders’ meetings due to a clash of views. A company may therefore resort to removing a shareholder.
There are a few ways to remove a shareholder from a Singapore company, and this article will explore 2 of these procedures:
- Following the removal mechanism(s) provided in the Shareholder Agreement
- Negotiating to purchase the shares from the shareholder
Both are potentially quick procedures for removing a shareholder. This is because the Shareholder Agreement is binding on all shareholders, while negotiation reduces the likelihood of being caught in costly and time-consuming legal action(s).
1. Removal Mechanism(s) Provided in the Shareholder Agreement
A Shareholder Agreement is essentially a contract among all the shareholders which sets out the rights and obligations of each shareholder, telling them what they can and cannot do within the company. This extends to the procedure for removing shareholders.
Referring to the Shareholder Agreement should be the first step to take when it comes to removing a shareholder from a company. This is because the agreement may already contain a set of removal mechanisms for removing a shareholder.
What kind of exit provisions does a Shareholder Agreement usually contain?
When a shareholder is willing to exit a company, the shareholder will willingly transfer his/her shares to another party. However, this transfer will be subject to the terms of the Shareholder Agreement.
For example, the agreement may contain restrictions such as pre-emption rights, where the shareholder must first offer his/her shares to all existing shareholders proportionately before being able to offer his/her shares for sale to outsiders. This helps prevent a shareholder from selling or transferring its shares to another party whom the remaining shareholder(s) may not wish to do business with.
What happens if a shareholder does not give consent to be removed from the company?
A Shareholder Agreement typically provides for various events where a transfer of shares is compulsory, even without the shareholder’s consent. Examples of such events include:
- A material breach of a provision in the Shareholder Agreement, which is not remedied within the number of days specified
- A shareholder, who is an entity, entering into liquidation, judicial management or otherwise reasonably be considered insolvent
- A shareholder, who is a natural person, passing away
- A deadlock among the shareholders, where there is a fundamental disagreement such that no progress can be made
Upon the occurrence of such an event, a mechanism may be triggered which results in the shareholder being forced to transfer his/her shares to either the company or the remaining shareholders, at a price and valuation method specified in the Shareholder Agreement.
If the shareholder refuses to transfer, this may be considered a breach of the Shareholder Agreement, which shall be resolved in accordance with the dispute resolution clause contained therein, for example, through mediation or arbitration.
2. Negotiate to Purchase the Shares From the Shareholder
In the event where there is no Shareholder Agreement, it may be better for the company to attempt negotiation in order to work out a compromise, rather than strictly rely on their legal rights.
One example of a compromise is to negotiate with the shareholder to either have him sell all his shares, or if he disagrees, to buy out his shares at a fair price instead.
However, the success of negotiation may be low in situations where communication between disputing parties have broken down. In such cases, it is helpful to find a reliable third-party such as a mediator or a lawyer, to facilitate discussions.
Procedure and Fees for Transferring Shares
The procedure for transferring shares is:
- Prepare a Share Transfer Agreement
- Determine if there are any restrictions to share transfers, for example, pre-emption rights
- Sign an instrument of transfer
- Seek board approval for the transfer
- Pay stamp duty to IRAS
- Cancel the original share certificate belonging to the shareholder concerned
- Submit notice of transfer to ACRA
- Issue a new share certificate to the shareholders who’ve purchased the shares
The relevant fees payable are:
- Purchase price of the shares
- Stamp duty, which consists of 0.2% of the purchase price of the value of the shares
- Late payment fee for stamping (if any) of up to $25 or four times the normal stamp duty payable, whichever is higher
For more information, refer to our article on transferring shares in a Singapore private company.
What Should You be Careful of When Removing a Shareholder From Your Company?
When attempting to remove a minority shareholder from the company, it is important to prevent oppressive behaviour from the majority shareholders. A minority shareholder is a shareholder who holds less than 50% of a company’s voting shares.
Some examples of oppressive behaviour to avoid when attempting to remove minority shareholders from the company include:
- Restricting payment of dividends
- Dilution of minority shares
- Exclusion from participation in the management of the company
Minority shareholders are protected from being unfairly prejudiced by dominant majority shareholders who subject them to commercially unfair treatment. In such situations, they may apply for relief from the oppressive acts under section 216 of the Companies Act.
Upon such application, the Singapore court may then provide any remedy which it deems fit to bring an end to the matter if rightly complained of.
What Happens If the Shareholder to be Removed is Also a Company Director?
There is no legal requirement under the Companies Act for a director to also be a shareholder. Therefore unless the company’s constitution requires otherwise, the removal of a shareholder who is also a director is allowed. The relevant person will then continue his/her duties as a director only.
If that person is also to be removed as a director of the company, the removal has to be done in accordance with the company constitution. For more information, refer to our article on how to remove a director from a company in Singapore.
The easiest and simplest way to remove a shareholder is to refer to the removal mechanism(s) provided in the Shareholder Agreement, if any. If your company does not have a Shareholder Agreement, or if the Shareholder Agreement does not provide for such removal mechanism(s), an alternative option is to negotiate a workable compromise instead, such as one party buying out the shares of the other.
However, as mentioned above, the success of the negotiation is not guaranteed. Therefore, it is optimal to have a Shareholder Agreement in place.
Please do not hesitate to reach out to one of our corporate lawyers if you require assistance in drafting a Shareholder Agreement, or if you require advice in removing a shareholder in the absence of a Shareholder Agreement.
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