Shareholder Agreements

Shareholder Agreements

Introduction

A shareholder agreement is a contract between the shareholders of a company. Essentially, it is a private agreement between two or more shareholders of the company. The agreement may be between the shareholders or can involve the company as well. Generally, a shareholder agreement sets out provisions ensuring the smooth operation of business within the company. Various issues can be covered in a shareholder agreement including but not limited to business plans, distribution of profits, the composition of the board of directors, capital structure, etc. There is no obligation for a shareholder to sign a shareholder agreement and such an agreement should be entered into voluntarily.

Need for a Shareholder Agreement

A shareholder agreement is not mandatory but is helpful for the smooth functioning of a company or business. A few reasons why a shareholder agreement may be needed are:

a) To supplement a companies’ constitution.
b) To include specific clauses between shareholders.
c) To address concerns of the shareholders.
d) To easily alter by contracting parties.
e) To protect minority shareholders.

Advantages of Shareholder Agreement

A shareholder agreement has the following benefits:

a) It is a confidential document for private viewing, unlike the constitution.
b) Covers issues not governed by or mentioned in the constitution.
c) Can include numerous clauses including non-competitive obligations thus preserving a first-mover advantage.
d) Can include investor rights and protection, thus attracting more investors.
e) Can protect the rights of minority shareholders.
f) Minimize disputes and provide procedures for dispute resolution.

Disadvantages of Shareholder Agreement

A shareholder agreement can be immensely beneficial for the shareholders of a company but has a few limitations. They are:

a) A shareholder agreement is not enforceable by all shareholders unlike the constitution of the company. Only parties to the agreement can enforce it.
b) New shareholders will need to sign into the agreement to be bound by it.

Types of Shareholder Agreement

A shareholder agreement is generally of two types depending on the signatories to the agreement.

1) Agreement between the shareholders: A shareholder agreement does not necessarily have to be entered into by all the shareholders of the company. No shareholder, who is not a part of the agreement, can enforce such an agreement. Certain shareholders can enter into a contract between themselves to define their private relationships like non-compete clauses or where one shareholder has the right to purchase the shares of another.

2) Agreement between shareholders and the company: Another type of shareholder agreement is when the company is a party to the agreement. In this type of agreement, the company and the shareholders can directly enforce the agreement against one another. However, such agreements can be disadvantageous for amending the agreement. Obtaining the consent of the company can be time-consuming as a large number of parties may be required to sign the document like the board of directors of the company.

Ideal Time to Draft a Shareholder Agreement

A shareholder agreement is not required to be submitted for the incorporation of the company. It can be drafted and signed at any point in time of the lifespan of the company. But it is encouraged that a shareholder agreement is drafted before or upon the incorporation of the company. This is because, with multiple shareholders, disagreements and misalignments are common issues that might arise in the future. Such disagreements might arise on issues regarding the management of the company, exit strategies, and policies among other things. Thus, if a shareholder agreement is drafted at an early stage of the company’s lifespan, such disagreements can be curtailed and ways to settle such disputes may also aid the company in smooth functioning. A few benefits of preparing a shareholder agreement at an early stage are:

a) Procedure for dispute resolution: A shareholder agreement at an early stage will allow shareholders to know how future disputes are to be resolved, thus curtailing disputes from arising as shareholders will know what they are getting into.
b) Protect rights of shareholders: Shareholders will be aware of their rights at an early stage of the company’s lifespan.
c) Informed Decision to Purchase: A shareholder agreement will allow shareholders to know what rights and obligations they will have as well as the policies and procedures of the company, thus giving them the knowledge of what they’re buying into.

Provisions Included in a Shareholder’s Agreement

There are no limitations for provisions that might be included in a shareholder agreement and generally, it depends on the objectives of the shareholders who are signatories to the agreement. Some general provisions that are included are:

  • The purpose and scope of the joint venture.
  • The company’s capitalization and initial and continuing finance requirements, as well as additional contributions to be made by one or more shareholders.
  • Profit-sharing policy.
  • Restrictions on the issue of new shares or the transfer of existing shares (including tag-along and drag-along provisions).
  • Deadlock and default (such as put or call options), as well as termination provisions.
  • The board of directors’ composition.
  • Minority safeguards (including veto rights on reserved matters and quorum requirements).
  • Jurisdiction and governing law.
  • Confidentiality and loyalty.
  • Compulsory acquisition of shares and access to corporate records.
  • Refusal of right and route of exiting.
  • Method for valuing and investment payback.

Registration of Shareholder Agreement

A shareholder agreement is a contract for private viewing between the signatories of the agreement. There is no legal requirement for the registration of a shareholder agreement and making it available for public inspection. Generally, the terms of the shareholder agreement are kept private by the shareholders.

Remedies for Breach of a Shareholder Agreement

A shareholder agreement is a contract between the shareholders who are parties to it essentially making the shareholder agreement a contract. It is governed by the Contract Law in Singapore. The remedies for breach in terms of the shareholder agreement include damages for the breach of contract. At the court’s discretion, an injunction is also sometimes awarded as a remedy for breach of a shareholder agreement. Shareholder agreements also include clauses stating that parties in breach of specific terms of the shareholder agreement must sell their shares to parties who have not breached the agreement or can even include buying the shares of non-defaulting parties at pre-agreed prices.

Conflicts between Constitution and Shareholder Agreement

Depending on the parties’ clear intentions, the document that will take precedence may differ. In many cases, the shareholders’ agreement specifies that if the contents of the shareholders’ agreement and the company’s constitution clash, the shareholders’ agreement will supersede. In the case of a disagreement, the company’s constitution is likely to prevail over the shareholders’ agreement if there is no clear provision on which document would prevail. This is because a shareholders’ agreement solely imposes personal obligations.

Case Concerning Shareholder Agreement

1) BTY v BUA and other matters [2018] SGHC 213

A shareholders’ agreement is entered into by a joint venture business and its shareholders. As specified in the agreement, the shareholders formally cause the firm to adopt new articles of association in the agreed-upon form. Several elements from the shareholders’ agreement are re-stated in the new articles. After several years, the shareholders’ relationship deteriorates. One of the shareholders claims that the firm has violated the articles of incorporation and filed a lawsuit against it. If proven, the claimed infringement of the articles would also constitute a breach of the shareholders’ agreement. An arbitration clause is included in the shareholders’ agreement. The articles do not do so. The question before the court was should the lawsuit be put on hold in favor of arbitration. The litigation of the shareholder was halted by the assistant registrar. The shareholder’s appeal of that judgment was heard by the judge and he granted the appeal and allowed the shareholder’s action to proceed. The Court of Appeal granted the plaintiff’s appeal and overturned the assistant registrar’s suspension of proceedings. It also ordered the Company to pay the plaintiff’s costs, which were set at $18,000, plus disbursements.