Your Guide to Shareholder Agreements in Singapore

Last updated on June 10, 2020

shareholders shaking hands in meeting room

What is a Shareholder Agreement?

A shareholder agreement is a contract that sets out how the company is to be managed to ensure the smooth operation of the business.

Shareholder agreements generally cover a multitude of issues such as the companies’ business plans, dividend policies, capital structure and board composition. It also stipulates the rights, powers and responsibilities of the various parties, including those of the shareholders, directors, and investors of the company.

Via a shareholder agreement, for example, shareholders may be given the power to appoint the Board of Directors (“the Board”), while directors may be given control over certain management decisions. You can learn more about shareholder rights and responsibilities in our other articles.

Shareholders are not obliged to sign a shareholder agreement. Hence, shareholders should enter into one only voluntarily.

Types of Shareholder Agreements

A shareholder agreement does not always have to be signed by all shareholders. It can also be signed by just the following parties:

Among some of the shareholders; and
Between the shareholders and the company.

For example, a shareholder agreement could be an avenue for certain shareholders to enter into private arrangements between themselves like non-compete agreements, and agreements where one shareholder has the right to purchase shares of another shareholder. In such cases, only the shareholders involved in such arrangements are required to sign the agreement.

On the other hand, if the shareholders and the company enter into a shareholder agreement, the company and shareholders would be able to directly enforce the terms of the agreement against one another.

However, a disadvantage of including the company as a party to the agreement is that the company’s consent may be required in the event the shareholder agreement needs to be amended, and that obtaining such consent may be cumbersome. This is because the consent of a larger number of parties may be required if the company is a party to the agreement as opposed to a smaller, determinable pool of shareholders.

For example, the consent of the Board members of the company may be required, by virtue of the company being a party to the agreement, even though the Board may not be directly involved in the shareholder agreement.

Why Might You Need a Shareholder Agreement?

A shareholder agreement can be used to supplement the company constitution. Such an agreement is especially useful when:

The company uses the Model Constitution template provided by the Accounting and Corporate Regulatory Authority (ACRA); or
The shareholders would like to include very unique or specific clauses in their agreement.

This is because the Model Constitution sets out only broad provisions relating to the governance of a company. On the other hand, a shareholder agreement has more prescriptive provisions that address the specific business requirements of the company as well as the concerns of the shareholders.

From a minority shareholder’s point of view, it may also be better to have a separate shareholder agreement instead of integrating its provisions into the company constitution.

This is because unlike the company constitution which can be changed through majority vote, a shareholder agreement can be altered only with the consent of all parties to the agreement.

Minority shareholders may therefore be able to better block changes to a shareholder agreement that affects their rights, as compared to changes to the company constitution for the same.

Do note that you do not need a shareholder agreement if you are the sole shareholder of your company.

Benefits of Having Shareholder Agreements

The benefits of having shareholder agreements are as follows:

A shareholder agreement is not open for public inspection, unlike the company constitution.
A shareholder agreement can spell out rules to govern matters not covered by the company constitution.
A shareholder agreement can be used to attract investors by granting greater investor protection and specific investor rights.
A shareholder agreement can be used to increase the company’s competitiveness, or to preserve a first-mover advantage, by specifying confidentiality and non-competitive obligations.
A shareholder agreement can protect minority rights. For instance, the agreement could include a provision requiring a minority shareholder’s presence to form a quorum at meetings. This provision could guard against the dilution of their shareholdings.

Limitations of Having Shareholder Agreements

A shareholder agreement is generally not enforceable by shareholders who are not parties to the agreement. It binds only the contracting parties, unlike the company constitution which binds all shareholders of the company.

This means that if the company is not a party to the shareholder agreement, there is generally no way to compel all the shareholders of the company to comply with the agreement’s terms, unless the terms are also incorporated into the company constitution.

New shareholders will have to also sign the shareholder agreement in order to be bound by its terms.

How the Shareholder Agreement is to be Completed/Executed

Where the shareholder agreement is between the shareholders themselves, the agreement is to be signed only by the shareholders.

If the agreement is between the company and the shareholders, the company (as represented by its directors or authorised staff) is also required to sign the agreement, in addition to the shareholders.

When is the Best Time to Draft a Shareholder Agreement?

It is highly recommended that the shareholder agreement be prepared before or upon the incorporation of your company as it ensures clarity and certainty of the company’s governance. Where there are multiple shareholders, it is likely that issues of misalignment may arise.

Shareholders may have divergent views on issues such as dividend policies, exit strategies and management of the company. The earlier the shareholder agreement is drafted, the earlier the shareholders are on the same page, and this in turn would help shareholders decide whether or not they should buy into the company.

Furthermore, expectations between shareholders are bound to change as the business progresses and this may lead to disagreements. When this happens, having a well-drafted shareholder agreement containing dispute resolution clauses early would serve as a good reference tool to settle any differences of opinion, hence avoiding unnecessary legal action among shareholders or against the company.

It is also recommended that you engage a corporate lawyer to help vet or draft your shareholder agreement to ensure that the agreement is comprehensive and that the interests of all shareholders are adequately protected.

What Terms Should a Shareholder Agreement Contain?

The contents of shareholder agreements depend on the needs of the parties to the agreement. Some prefer a simple and straightforward agreement while others prefer to go into detail and spell out every obligation in the operation of the company.

While shareholders generally have the freedom to dictate the terms of the agreement, the extent of such freedom given depends on the bargaining power of the individual shareholders. Hence, not all shareholders may have a say in the contents of the agreement.

A well-drafted shareholder agreement will generally contain the following essential terms:

Term	Definition
Business of the company	A clause explicitly stating the business of the company prevents any major changes to the business after the company is incorporated. This clause is useful as shareholders would not want the business altered radically from its original conception to protect themselves from unforeseen risks.
Shareholding of the company	This clause specifies the quantity and type of shares (e.g. ordinary or preference shares) held by the shareholders of the company.
Share capital and rights	This clause stipulates the share capital of a company, which refers to the amount invested in the company, as well as the types of rights attached to the shares.
Restriction on transfer of shares	These agreements restrict the transfer of shares unless prior approval has been obtained from other shareholders. Such a restriction is necessary as the Companies Act requires private companies to restrict the transfer of their shares.
Management of the company	This clause sets out the number of directors comprising the Board and the manner in which the shareholders may appoint the Board. This clause can also restrict the types of decisions that the Board are allowed to make.
Return of investment	This clause stipulates how the founders and investors can recover their investment and also explains the company’s dividend policy.
Valuation method	Such clauses set out how shares are to be valued in the event of a share sale.
Exit route	This clause explains how investors and founders may sell their shares. For example, a drag-along rights clause might be added to when the majority shareholders have agreed to the sale of all company shares. This drag-along rights clause might also include the percentage of shares required to compel the minority shareholders to sell their shares on the same terms as the majority.

In addition to the essential terms above, the following terms may also be included, subject to the needs of the parties:

Term	Definition
Right of first refusal	Some shareholder agreements allow for shareholders to have the right of first refusal when someone wishes to sell their shares. This clause confers shareholders with the right to buy some or all shares being sold before the shares are sold to others.
Compulsory purchase of shares	There could be agreements where a shareholder would be required to sell his shares to the remaining shareholders under certain circumstances, such as in the event of bankruptcy, death or a breach of an obligation in the shareholder’s agreement. This clause allows for the shares to still be maintained by the company, hence protecting the company’s interest. In the absence of this clause, any shares held by, for example, a deceased shareholder, may be passed under the shareholder’s will to his immediate family members, resulting in an outsider having a significant shareholding in the company and being able to dictate the company’s affairs.
Access to company records	This clause stipulates what entails the company records (e.g. meeting minutes, company contracts and accounting records) and how they are to be stored. Furthermore, this clause may vest shareholders with the power to vet company records as they deem fit.
Intellectual property rights	Such clauses ensure that all intellectual and industrial property rights connected to the company will be assigned to the company or any person appointed by the company.
Loyalty	Non-competition and non-solicitation clauses restrict shareholders from leaving and starting a rival company, as long as these shareholders are parties to the shareholder agreement. Shareholders who commit to such clauses agree not to solicit employees, suppliers, or clients of the company, or engage in any business that competes with the business of the company.
Confidentiality	This clause states the types of information that should be kept confidential. These may include client lists and details, trade secrets, business plans, financial information, employee lists and details. It can also stipulate the kinds of obligations that are necessary to ensure that the company’s secrets are preserved. For example, a clause could be included whereby a shareholder has to obtain the prior approval of the Board before divulging any confidential information.
Governing law and jurisdiction	The clause on the governing law states which country’s law is to be used to interpret the terms of the shareholder’s agreement. Such a clause is essential, especially where there is a cross-border element to the agreement, or where multiple international parties are involved. On the other hand, the jurisdiction clause specifies which country’s courts should hear a dispute. Including a jurisdiction clause helps to prevent any disputes on where a case should be litigated.

Where Should You Keep Your Shareholder Agreement?

Shareholder agreements are internal documents to be used within the company. You should keep a copy of this agreement in the company’s minute books, together with other official company records and documents.

Access to shareholder agreements should be restricted since shareholder agreements are highly confidential.