Shareholders' Agreement for Starting a Business in SingaporeDownload Now: FREE GST 2023 GuidebookDownload Now: FREE Employment Pass ChecklistDownload Now: Free Incorporation Checklist
Have you been curious about starting a business in Singapore? If so, you probably know the type of business you want to create and the business structure you would like to form.
To start a business in Singapore involves the incorporation of the company, which entails a shareholders' agreement to formalize the relationship between you and the other shareholders in founding your business.
As such, the shareholder agreement is an essential aspect of any business. Because of this, it is crucial to have a good understanding of what a shareholder agreement is and how it works before you sign one for your business. Keep reading to learn more.
What Is a Shareholder Agreement?
A shareholder agreement is essentially an agreement between the founders of a business during its formation. It governs the terms and conditions of the relationship between them and how to manage the company to ensure the operations and control of the business run smoothly. The agreement generally covers several issues, such as;
- Business of the company
- Capital structure and rights
- Issuance of shares
- Composition of the board of directors
- Business plans
- Dividend policies, etc.
Moreover, the shareholders' agreement also lays down the powers, responsibilities, and rights of different parties. This includes those of investors, shareholders, and directors of the company.
For instance, through a shareholder agreement, the shareholders can be given the mandate to choose their Board of Directors. On the other hand, directors may be able to decide on specific management issues.
Generally, a shareholder agreement serves as a framework for sharing control and developing long-term goals for the company.
However, it is essential to note that shareholders only need to sign a shareholder agreement if they only do it voluntarily. Nonetheless, it would be best if you considered signing one to properly lay down the terms of your relationship and avoid future disputes.
Types of Shareholder Agreements
It is essential to understand that all shareholders only sometimes have to sign the shareholder agreement. These other parties can also sign the agreement;
Agreement between the shareholders
Certain shareholders may use a shareholder agreement to establish private agreements, such as non-compete agreements and rights to acquire shares from other shareholders. Only the shareholders participating in such arrangements must sign the agreement in such circumstances.
Agreement between shareholders and the company
In this case, the company and the shareholders need to sign the agreement. As such, it may bind two parties to the terms of the agreement they directly enforce against one another.
However, a particular drawback exists to including the company in the agreement. The inclusion of the company as a party to the agreement has the disadvantage that it may be challenging to gain the company's consent if the shareholder agreement needs to amend.
Obtaining consent from a more significant number of parties is hectic and time-consuming compared to just a few shareholders.
Why You Need a Shareholder Agreement
Understanding that you can use a shareholder agreement to supplement your company's constitution is crucial. The agreement is helpful when your company incorporates the Model Constitution template given by ACRA, which is the Accounting and Corporate Regulatory Authority.
It also comes in handy when shareholders want to incorporate specific and unique clauses in the agreement.
To understand that the Model Constitution only lays down general provisions regarding a company's governance. On the contrary, a shareholder agreement is more specific and details the actual business requirements and the shareholders' concerns.
For instance, a shareholder agreement comes in handy when laying out and specifying the rights of minority shareholders. The shareholders can also use it to allocate the responsibility for a particular issue among you and other shareholders. This can guide you and other shareholders when disagreeing on that specific issue.
Remember that a shareholder agreement is unnecessary if you are the only stakeholder in your company.
When Should You Draft a Shareholder Agreement?
It is crucial to consider drafting a shareholder agreement before the company is incorporated or upon the incorporation of a company. The agreement guides you and your shareholders when starting a business in Singapore, controlling the operations and management of the business.
In short, a shareholder agreement is a key to shaping your company's future and laying down the rules which will be held collectively by the shareholders of your corporation.
To decide whether you should draft a shareholder agreement or not, you should ask yourself;
- Do you want to include specific and unique clauses in your agreement?
The agreement can be helpful when you wish to incorporate special and unique clauses in the agreement. You can include such clauses as a guide for all the shareholders to regulate their respective rights.
- Do you have a conflict over an issue in your company?
Conducting discussions with other shareholders about an issue can be rather hectic. Therefore, the shareholder agreement will guide you when you dispute with other shareholders.
As you draft the agreement, always remember to include a corporate lawyer. The lawyer will help you ensure that all the shareholders' interests are well protected, and the agreement shall be enforceable by all the parties.
Key Considerations for a Shareholder Agreement
The contents of the shareholder agreement will highly depend on the parties' needs. Some individuals prefer a simple agreement, while others prefer a more extensive document.
Generally, shareholders have the power to stipulate the terms of the agreement. However, the extent of this freedom will depend on each shareholder's bargaining power. Only some shareholders will equally place in the bargaining position.
Here are some key considerations when drafting a shareholder agreement;
- Distributing Profits
Shareholders should be given a reasonable share of the profits. This would ensure that one shareholder does not get an unfair advantage over another when distributing profits.
- Minority Protection
Minority shareholders should be protected, and their interests are not be jeopardized. The agreement should stipulate that the other majority shareholders cannot sell the business without the consent of the minority shareholders.
- Approval of Shareholders on Certain Matters
Majority shareholders should have little rights to control or direct the business. The agreement should allow other shareholders to participate in matters such as approving a significant change in the company's business, appointing a new director, or removing an existing director.
- Future Financings
The shareholder agreement should stipulate that all the shareholders are given an equal opportunity to participate in the future financing of the business.
- Voting and Quorum
The agreement should specify the procedure for voting and the number of shareholders needed to make an important business decision in your company.
Where Do You Keep Your Shareholder Agreement?
A shareholder agreement is an essential internal document you will use when starting a business in Singapore. You must keep the agreement and use it to guide your decisions when running your business. You should therefore keep a copy of this vital document in your minute books alongside other official documents and company records.
Be sure to restrict access to this agreement to your company's directors and authorized personnel. Do not allow unauthorized individuals to access your company's sensitive information.
Benefits of Having Shareholder Agreements
There are many benefits of having a shareholder agreement in your company. Some of them are;
- The agreement will guide you and the other shareholders during the formation of a company. It will also be your go-to guide when making critical decisions and regulating your company's policies.
- The agreement will protect you and other shareholders from making impulsive decisions or allowing conflicts to tear your company apart.
- The agreement will not be open for public inspection and will not adversely affect your company's image.
- The company can utilize the shareholder agreement to attract investors looking for a company that is run professionally.
- You can easily protect the minority rights of the shareholders using the agreement.
Limitations of Having a Shareholder Agreement
Shareholder agreements can also have some limitations. For instance, only the parties participating in the agreement (contracting parties) receive the mandate to enforce it. This is different from the company's constitution, which allows all the shareholders to implement the same.
Also, in the case of new shareholders, they will have to sign the agreement for them to be legally bound to its terms.
The Bottom Line
Starting a business in Singapore is a good idea, but you should always have a well-mapped plan to guide you in running your business. A shareholder agreement will protect your interests and the interests of other shareholders in your company. Without it, misunderstandings can arise between the shareholders and ruin your business. Be sure to get a corporate lawyer to draft the agreement to ensure that all the parties' interests are protected. Contact us today for a consultation to learn more about starting a business in Singapore.