Your Guide to Shareholder Agreements in Singapore

Last updated on December 4, 2018

What is a Shareholder Agreement?

A shareholder agreement supplements the company constitution and sets out the understanding of the various business parties. It stipulates the ground rules as to how the company is to be managed to ensure the smooth operation of the business.

Shareholder agreements also regulate the rights, powers and responsibilities of the various parties, including those of the shareholders, directors, and investors of the company. Learn more shareholder rights and responsibilities in our other articles, for example.

Types of Shareholder Agreements

Shareholder agreements may be entered into by the following parties:

  1. Some of the shareholders;
  2. All of the shareholders; and
  3. Shareholders and the company.

One advantage of including the company in a shareholder agreement is that the company directly undertakes the obligations in the agreement, making enforcement of the agreement’s terms easier.

However, a disadvantage of doing so is that the company’s consent may be required in the event the shareholder agreement needs to be amended.

Why Might You Need a Shareholder Agreement?

A shareholder agreement can be used to supplement the company constitution, which may not be sufficient to cover the company’s specific business requirements.

This is especially if the company made use of the default constitution template provided by the Accounting and Corporate Regulatory Authority (ACRA) and did not modify it to suit its needs before filing the constitution with ACRA.

Benefits of Having Shareholder Agreements

The benefits of having shareholder agreements are as follows:

  1. Unlike the company constitution which can be changed through the casting of votes, a shareholder agreement can only be altered with the consent of all parties to the agreement.
  2. A shareholder agreement is not open for public inspection, unlike the company constitution.
  3. A shareholder agreement can spell out the rules governing matters not covered by the company constitution.
  4. A shareholder agreement can be used to attract investors by granting greater investor protection and specific investor rights.
  5. 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.

Limitations of Having Shareholder Agreements

A shareholder agreement is generally not enforceable by shareholders who are not parties to the agreement. If the company is not a party to the agreement, there is generally no way to compel the company to comply with the terms, unless the terms are incorporated into the company constitution.

In contrast to the company constitution which binds all the shareholders of the company, a shareholder agreement only binds the contracting parties. New shareholders will have to sign the shareholder agreement to be bound by its terms.

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 stripped down, streamlined agreement, coupled with a common sense application of its terms. Others prefer to go into detail and spell out every obligation in the operation of the company.

Ultimately, parties have the freedom to dictate the terms of shareholder agreements as they please to conform to their needs.

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

  1. Management of the company: Who will exercise the management functions of the company?
  2. Loyalty and confidentiality: What kinds of obligations are necessary to ensure the company’s secrets are preserved? How can the founders be restricted from leaving and starting a rival company?
  3. Return of investment: How can the founders and investors recover their investments? What is the company’s dividend policy?
  4. Valuation method: In a share sale, how will the shares be valued?
  5. Exit route: How can the founders and investors sell their shares?

Shareholder Agreement Template

Need a shareholder agreement template? You can get one for free here.