Do You Need a Shareholders Agreement?

What is a Shareholder Agreement?

Shareholders are viewed as the real owners of a company. The Shareholder’s Agreement is a contract between the company and its shareholders that lays out their rights and responsibilities. Shareholder agreements often include a wide range of subjects, including the company’s business goals, dividend policy, capital structure, and board of director’s structure. It also specifies the different parties’ rights, duties, and obligations, including those of the company’s shareholders, directors, and investors.

Is the Shareholder Agreement Mandatory?

A shareholder agreement, unlike a company constitution, is not a legally binding document that must be submitted as part of the formation procedure. Therefore, the signing of a shareholder agreement is optional for shareholders. As a result, shareholders should only participate if they want to.

Nevertheless, a shareholder agreement is still strongly recommended for incorporated businesses with more than one shareholder. An incorporated company in Singapore is not likely to operate without a shareholder agreement. Thus, it is essential to have a shareholder agreement.

Why is it necessary to have a Shareholder Agreement?

The Agreement assists shareholders in making informed choices. It ensures that everyone is on the same wavelength regarding important issues like dividend policy, voting rights, signatories, extra share issuance, new shareholder entry, and shareholder departure. More significantly, unlike the constitution, which is open to the public, the Agreement may layout more detailed and essential regulations governing the business and the relationship between the shareholders. Since it is a private document, it can protect the parties’ secrecy. The more benefits are as follows:

Helps shareholders to make an accurate choice to invest:

There are likely to be some disorders between what each shareholder wants in the firm when there are many owners – on topics like who would control the management, how shareholders leave the company or the company’s dividend policy. This guarantees that all shareholders are on the same side and clearly understand what they are buying in.

Helps in minimising the disputes:

A shareholder agreement is signed in order to settle any disagreements between the shareholders and the company. These include problems such as share transfer, shareholder departure, and the price of shares at which these transactions occur. A comprehensive shareholder agreement will clearly lay out these rules and processes so that all shareholders are on the same level. Of course, we can’t be positive that nothing will ever go wrong. In cases when nothing is certain, such agreements aid us in resolving conflicts and maintaining a healthy relationship between shareholders and the business.

Helps in Protecting Shareholder’s rights:

The Agreement also protects the interests of the shareholders, particularly minority owners, who may be confident in their rights in the business. This is due to the fact that, unlike the company constitution, which may be amended by majority vote, a shareholder agreement can only be changed with the permission of all parties to the Agreement. Minority shareholders may therefore be able to oppose changes to a shareholder agreement if the changes are affecting their rights.

Therefore, as no two shareholders are alike, it is essential to have a shareholder’s Agreement. An agreement must be written with the understanding that each individual is unique and has different viewpoints on the issues at hand. And they may or might not agree with one another.