Do You Need a Shareholder Agreement When Setting Up?

Last updated on July 20, 2020

What is a Shareholder Agreement?

A shareholder agreement is a legal document that stipulates the rights and obligations of shareholders in a company, including shareholder relations and the management of the company. It may also supplement the company constitution by adding additional rules and regulations not covered in the constitution.

A shareholder agreement can be entered into between some of the shareholders of a company, all of the shareholders, or the shareholders and the company.

Sole-proprietorships and partnerships, which do not have any shareholders, are unable to enter into a shareholder agreement. In the case of partnerships, what would be applicable is a partnership agreement.

Is a Shareholder Agreement Compulsory?

Unlike the company constitution, a shareholder agreement is not a mandatory document and you do not have to submit one as part of your company’s incorporation process.

However, it is still highly recommended for incorporated companies with more than one shareholder to have a shareholder agreement in place. It is highly unlikely for an incorporated company in Singapore to do without a shareholder agreement.

Why Do You Need a Shareholder Agreement?

There are various benefits to having a shareholder agreement.

A shareholder agreement binds only the shareholders who sign the agreement and can only be altered by these contracting parties. Moreover, a shareholder agreement can supplement the company constitution by adding any rules or regulations that were not mentioned at the time the constitution was written. It is also a document for private viewing, unlike the constitution which is for public viewing, hence protecting the confidentiality of the document.

Even though a shareholder agreement is not required for submission when you incorporate your company, the best time to draft your shareholder agreement would be before or upon the incorporation of your company. Shareholder agreements can be drafted and signed at any point in time of the company’s lifespan, but they should be done as part of your set-up process.

Here’s why you should have your shareholder agreement before your company incorporates, and not after. Do note that this list is non-exhaustive and merely highlights the more distinctive benefits to drafting your shareholder agreement early in the incorporation process:

1. Allow shareholders to make an informed decision to buy in

With multiple shareholders, there are bound to be certain misalignments as to what each shareholder wants in the company – on issues such as who exercises management, how shareholders exit the company, or the dividend policy of the company. This ensures that shareholders are on the same page and know what they are buying into. Hence, a shareholder agreement before or during a company’s incorporation will then allow shareholders to have the full prerequisite knowledge they need before they buy into the company.

2. Minimise disputes and decide on procedures for dispute resolution

With two or more shareholders in the company, disputes among shareholders often arise. These include issues such as the transfer of shares, the exit of shareholders, and the price of shares at which these transactions occur. A comprehensive shareholder agreement will spell out these terms and procedures clearly to allow shareholders to be on the same page. Should disputes still persist, shareholder agreements will also include clauses to stipulate the respective procedures for dispute resolution among shareholders. This will prevent unnecessary legal action among shareholders or against the company.

3. Protect shareholder rights

Shareholder agreements can also cover the rights and obligations of existing shareholders. For instance, should the company decide to offer new shares, a shareholder agreement will stipulate if the shares will first be offered to existing shareholders or to a third party. Shareholders should also be made aware of specific rights such as their voting rights when the company appoints a new director, through the shareholder agreement. The protection and definition of shareholder rights will be of added assurance especially for minority shareholders.

Shareholder Agreement as Part of the Incorporation Process

Hence, it is highly recommended that business owners looking to incorporate a company draft the company’s shareholder agreement early in the set-up process. Having a shareholder agreement is crucial to the smooth management of your company and managing the relationships between shareholders and other stakeholders of the company.