Corporate Advisory Tip : Shareholders’ Agreement
This document is so important, and yet it is very often neglected & even ignored when business partners are forming a new company !
Let me try to explain how it works here…
1. A shareholders’ agreement is an agreement amongst the shareholders of a company
2. In strict legal theory, the relationships amongst the shareholders & those between the shareholders & the company are regulated by the Constitution of the company.
3. Where there are a relatively small number of shareholders, like in a startup company, it is quite common in practice for the shareholders to supplement the constitutional document.
4. There are a number of reasons why the shareholders may wish to supplement the constitutional documents of the company in this way:
* the shareholders might wish to provide for disputes to be resolved by arbitration, or in the courts of a foreign country (meaning a country other than the country in which the company is incorporated )
* In some countries, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents.
5. When setting up a company with family or friends it is easy to assume that nothing can go wrong in the future.
* You might assume that as you trust one another you do not need to put in place something like a shareholders’ agreement – in fact, you might think that asking for a shareholders’ agreement will make it sound like you do not trust or respect your new business partners.
Hopefully nothing will go wrong in the future.
* However, even family members & best friends fall out &, if the worst should happen, you could then end up with nothing.
* Or you might face the breakdown of a friendship alongside a costly & acrimonious legal dispute related to the business.
6. Although the company’s articles of association will help to some extent, a fully considered & well drafted shareholders’ agreement can act as a safeguard & give you & your fellow shareholders more protection against these types of scenario.
7. Although some people with a shareholders’ agreement will never need to rely on its terms, there will be many more cases where shareholders wish they had taken the time to put a proper agreement in place.
8. Shareholders’ agreements vary enormously between different countries & different commercial fields.
* In a characteristic joint venture or business startup, a shareholders’ agreement would normally be expected to regulate the following matters:
A. regulating the Ownership & Voting Rights of the shares in the company, including :
* restrictions on transferring shares
* pre-emotive rights & rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement )
* minority protection provisions
B. Control & Management of the company, which may include :
* power for certain shareholders to designate individual for election to the board of directors
* imposing super-majority voting requirements for “reserved matters” which are of key importance to the parties
* imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law
C. Making provision for the resolution of any future disputes between shareholders, including :
* dispute resolution provisions
D. Protecting the Competitive interests of the company which may include :
* restrictions on a shareholder’s ability to be involved in a competing business to the company
* restrictions on a shareholder’s ability to poach key employees of the company
* key terms with suppliers or customers who are also shareholders
E. In addition, shareholders agreements will often make provision for the following routine items :
* the nature & amount of initial contribution (whether capital contribution or other) to the company
* the proposed nature of the business
* how any future capital contributions or financing arrangements are to be made
Hope above gives you some useful tips on what to do before you decide to incorporate a new company with your business partners
If you need help, feel free to contact us at :
(O) +65 63851011
(M) +65 90880669
www.corporatebackoffice.com.sg
