Shareholders' agreements in Singapore: what to include

Constitution and shareholders' agreement

Every Singapore company has a constitution, filed with ACRA and open to the public. It binds the company and all of its shareholders, and changing it needs a special resolution (75% of votes).

A shareholders' agreement is a private contract. It usually sits alongside the constitution and adds rights to it. It binds only the shareholders who sign it, so a new shareholder joins by signing a deed of accession, and it can usually be changed only if all its parties agree.

Reserved matters

Reserved matters are decisions that need a higher majority, unanimous approval or a named shareholder's consent, rather than a simple majority. They are how a minority shareholder gets a veto over the decisions that matter most. Typical examples are issuing new shares, borrowing above a set amount, changing the nature of the business, merging with another company and transferring intellectual property.

The board

The agreement usually sets how many directors there are, who may appoint them (often in proportion to shareholdings) and how board decisions are made.

Breaking a deadlock

In a company owned 50:50, or where each side has a veto, the agreement should say what happens when the owners cannot agree. Options include:

• A casting vote for the chairman.
• Escalation to senior management, then mediation.
• Put and call options, letting one side require the other to buy or sell.
• A 'Russian roulette' clause: one side names a price, and the other must either buy or sell at that price.
• A 'Texas shoot-out': both sides submit sealed bids, and the higher bidder buys.

Selling shares

Most agreements control who can become a shareholder:

• Pre-emption: existing shareholders get the first right to any new shares, so their percentage is not diluted.
• Right of first refusal: a shareholder who wants to sell must first offer the shares to the others on the same terms.
• Lock-up periods, during which shares cannot be sold at all.
• Drag-along: if a majority agrees to sell to a buyer, it can require the minority to sell on the same terms.
• Tag-along: if a majority sells, the minority can insist on selling on the same terms.

Other clauses

Agreements commonly also deal with dividend policy, non-compete, non-solicitation and confidentiality, and how disputes are resolved, often by mediation and then arbitration. If relations break down badly, the Companies Act also gives shareholders a remedy against oppression (section 216), but a clear agreement is a far better place to start.