What Is A Shareholders’ Agreement?

A shareholders’ agreement is a contract between the persons (or even companies) who are parties to it, and set outs and regulates the different rights, powers and obligations of various parties. These include shareholders, directors and, if applicable, investors of the company. 

A shareholders’ agreement may be enforced in other jurisdictions so long as it is set out inside the agreement and agreed upon. In Singapore, shareholders’ agreements are governed by Singapore Contract Law.

Where there is no shareholders’ agreement in place, the relationship of shareholders between themselves and with the company are governed by the Constitution, or by the Memorandum of Association and Articles of Association (“M&AA”) for companies incorporated before 2014, prior to amendments to the Companies Act.

Why The Need For A Shareholders’ Agreement If There Is A Constitution or M&AA?

Where not covered by the Constitution, a Shareholders’ Agreement may supplement it by implementing additional rules and regulations, and sets out the understanding of the various business parties.

More importantly, as a general rule, only the parties to a contract can sue or be sued under the contract, as it only binds only the parties who sign the agreement and can only be altered by the same contracting parties.[1]

Highlighting Some Advantages Of A Shareholders’ Agreement

No.1 – As a shareholders’ agreement can introduce any new rules or regulations that were not incorporated into the Constitution at the time it was written, it allows for changes and flexibility to accommodate the growth and changes of the company.

No.2 – Unlike that of a Constitution, the shareholders’ agreement is confidential and not available for public viewing.

No.3 – The Singapore laws do not prescribe any limit on the term of a shareholders’ agreement.

No.4 – A shareholders’ agreement can be drafted and signed at any point of time of the company’s life-span.

No.5 – Although the shareholders’ agreement is not mandatory document, it is still highly recommended for incorporated companies with more than one shareholder. This is to ensure that all shareholders are informed and aligned as to what they are contracting into. A shareholders’ agreement allows for shareholders to gain all prerequisite knowledge they require before buying into the company.

No.6 – As shareholders’ disputes are largely common, a shareholder’s agreement minimises disputes and streamlines the process and procedures for dispute resolution. This will prevent unnecessary legal action amongst shareholders or against the company.

No.7 – A shareholders’ agreement can also protect shareholders’ rights as it is typical for a shareholders’ agreement to set out specifics such as shareholders’ voting rights. Minority shareholders in particular can be made aware of their rights and be assured of protection, if properly set out in the shareholders’ agreement.