10 Critical Issues to Consider When Drafting Shareholder Agreements to Avoid Future Litigation

When starting a new business venture, it’s crucial to establish clear guidelines and expectations for all parties involved. This is particularly true when it comes to the ownership structure of the company, which can have significant implications for the company’s future success. Shareholder agreements are one way to establish these guidelines and ensure that all shareholders are on the same page. However, drafting a shareholder agreement requires careful consideration of a range of critical issues, such as ownership structure, transferability of shares, voting rights, management structure, decision-making procedures, dividend distribution, dispute resolution mechanisms, confidentiality, termination provisions, and non-compete clauses. In this article, we will explore each of these issues in detail and provide guidance on how to draft a comprehensive shareholder agreement that can help prevent disputes and litigation down the line.

In Singapore, there has been a substantial increase in disputes, with the?SIAC reporting over 650 new cases in 2020, up from 479 in 2019. Of these disputes, a substantial number involve shareholder disputes. Typical examples of incidents that cause a shareholder dispute include a majority shareholder’s or management’s actions to oppress the minority shareholders (such as diluting the minorities’ shareholdings), concerns over management conduct (such as fraudulent actions or misappropriating the company’s assets), and disputes arising from a sudden transfer of shares to a 3rd party (such as when the company’s shares are held as security for debt obligations, and the lender takes control of the secured shares as the debt obligations are not fulfilled).

Section 216 of the Companies Act, 1967 provides shareholders with the right to claim remedies in cases of oppression or injustice. Section 216(1)(a) provides that any member or holder of a debenture of a company may apply to the Court for an order in the case where the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including the applicant or in disregard of his, her or their interests as members, shareholders or holders of debentures of the company.

In order to avoid future litigation originating from the provisions of the?shareholders’ agreement, these are the few points that should be kept in mind while drafting an ideal?shareholders’ agreement. There must be a proper balance between the rights, duties, and obligations of the shareholders.

• Clear Objectives and Goals:?The?shareholders’ agreement?should clearly state the objectives and goals of the company, and how the shareholders will work together to achieve those objectives.
• Roles and Responsibilities:?The agreement should define the roles and responsibilities of each shareholder, including how decisions will be made and who will have the final say.
• Decision-Making Process:?The agreement should clearly outline the decision-making process, including how decisions will be made and what happens if shareholders disagree.
• Capital Contributions: The agreement should specify how much capital each shareholder will contribute, and what happens if a shareholder fails to contribute their share.
• Dividend Policy:?The agreement should outline the company’s dividend policy, including how dividends will be distributed and how often they will be paid.
• Share Transfer Restrictions:?The agreement should specify restrictions on the transfer of shares, including whether or not shares can be sold or transferred to third parties.
• Exit Strategy:?The agreement should include an exit strategy for each shareholder, including what happens if a shareholder wants to sell their shares, retire or die.
• Dispute Resolution: The agreement should outline a process for resolving disputes between shareholders, such as mediation or arbitration.
• Confidentiality and Non-Compete Clauses: The agreement should include confidentiality and non-compete clauses to protect the company’s trade secrets and prevent shareholders from competing with the company.
• Termination and Amendment: The agreement should specify how the agreement can be terminated or amended, including what happens if one shareholder wants to leave the company or if the company is sold or merged with another company.

Conclusion

A well-drafted?shareholders’ agreement?can avoid the majority of the financial and structural repercussions as a result of litigations due to differences of opinion between the shareholders and the management of the company. It’s important to remember that shareholder agreements are legally binding documents that have far-reaching implications for the company’s future, so it’s crucial to seek legal advice and guidance when drafting them. Ultimately, a well-crafted shareholder agreement can provide the foundation for a successful and harmonious business relationship between shareholders.

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For your free first consultation or if you simply require more information, email us at??[email protected].