What is a Shareholders’ Agreement?

Published - 24 January 2021, Sunday

A Shareholders’ Agreement is a legal document that sets out the rights and obligations of the shareholders in a company and also spells out the shareholders’ relations and the management of the company.

The purpose of the agreement is to define the rights of the shareholder and protect their investment in the company as well as to establish the rules that govern how the company is managed, and critical decisions are made.

As for the parties to the agreement, it could be all the shareholders or some of the shareholders or the shareholders and the company. It is akin to a Partnership Agreement in a partnership entity.

In Singapore, Shareholders’ Agreements are frequently used in closely held companies or joint venture companies to regulate the different rights and obligations of shareholders.

If there is no shareholders’ agreement in place, the relationships of shareholders as between themselves and with the company are governed by the articles of association of the company

Why do you need a Shareholders’ Agreement?

The agreement helps the shareholders make informed decisions and ensures that all of them are on the same page regarding the critical elements such as dividend policy, voting rights, signatories, issue of additional shares, admission of new shareholders and exit of shareholders.

Establishing such common grounds of understanding minimises the potential disputes, and even if disputes arise, the agreement stipulates the procedures for resolution thus preventing the propensity of the disputes to affect the normal conduct of the business.

The agreement also protects the rights of the shareholders, especially the minority shareholders can rest assured of their rights in the company.

More importantly, the agreement can set forth more specific and important rules regarding the company and the relationship between the shareholders, and unlike the constitution, which is available for public viewing, the agreement is a private document hence can uphold the confidentiality of the parties.

Read more about Shareholders Agreement at Rikvin

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