Crafting Effective Director and Shareholders Agreements for SMEs in Singapore

Introduction

This post is targeted at directors and senior management of SMEs in Singapore. As key decision-makers, you play a critical role in establishing governance structures and protecting shareholder interests. The purpose of this article is to provide insights and guidance on crafting effective director and shareholder agreements.

In this article, Chandra Mohan, a Chartered Accountant with over 25 years' experience, discusses the complexities of these agreements. The information presented can assist you in defining roles, mitigating conflicts, and ensuring the long-term success of your business.

Director and Shareholder Agreements: Key Considerations for SMEs

In an evolving SME, it is vital to have a well-structured director and shareholder agreement. As well as defining the roles and responsibilities of shareholders and directors, the agreement serves as a safeguard against potential disputes. The key elements of the agreement are as follows.

1. Identifying Shareholders and Their Contributions

The agreement should clearly define who the shareholders are and detail their contributions, whether in cash, assets, or services. This clarity helps in establishing ownership stakes and expectations from the outset.

2. Rights of Further Allotment and Loans

Shareholders should have defined rights regarding further allotment of shares or the ability to provide loans to the company. This ensures that existing shareholders can maintain their proportional ownership and influence in future funding rounds.

If there’s a need for further share issuance, the agreement should stipulate the proportion of shares to be issued to ensure that existing voting rights are not diluted. This is particularly important in maintaining control among current shareholders.

3. Shareholders Who Are Also Directors

In many SMEs, shareholders are also directors. The agreement should specify who these individuals are, as this dual role can complicate decision-making processes, accountability and any remuneration.

4. Business Operations and duties

It’s essential to outline the place of business and the nature of the business. This provides context for the operations and can influence various aspects of the agreement, including compliance with local regulations.

The duties and responsibilities of directors are crucial for the smooth and effective running of the business. Some key director duties and responsibilities include:

·???????? Managing daily operations. Identify which Director (s) will oversee the organization's day-to-day operations and ensure efficiency.

·???????? Making strategic decisions. Identify which directors will be crucial to setting the company's strategic direction and making key decisions.

·???????? Managing compliance and governance. Identify the directors responsible for ensuring compliance with relevant laws, regulations, and statutory requirements.

·???????? Reporting and communication. Decide which directors will provide regular financial updates and reports to shareholders.

?By clearly defining the duties and responsibilities of directors within the directors and shareholders agreement, SMEs can establish a robust governance framework that supports the long-term success and stability of the business.

5. Powers of Directors

Directors should have clearly defined powers, example, the authority to:

• Sign and execute legal and bank agreements
• Engage and terminate employees
• Operate the company’s bank account

These powers should be balanced with checks to prevent misuse.

6. Restrictions on Daily Operations

To avoid conflicts, the agreement should specify any restrictions on the powers of directors. For instance, certain decisions may require the consent of specific directors (e.g., Director A or Director B only). In case of disputes, it should be clear that the shareholders’ meeting serves as the final authority.

7. Financial Transparency

Regularly making accounts available to shareholders, whether audited or unaudited, is vital for maintaining trust and transparency. This practice can help prevent misunderstandings and disputes over financial matters.

8. Profit Distribution

The agreement should outline how profits, salaries, perks, and dividends will be distributed. For example:

• 1st Year: No Dividends, only salary.
• 2nd Year: 70% retained earnings for future operation, 30% distributed as dividends to shareholder or based on company performance.

This clarity helps in setting expectations and planning for future growth.

9. Responsibilities and Good Faith

Each party must agree to act in good faith and avoid conflicts of interest. This principle is fundamental in fostering a cooperative business environment.

10. Restrictive Clauses

To protect the business, the agreement should include clauses restricting shareholders and directors from [example]:

• Engaging in similar businesses or interests.

• Resigning or seeking employment with competitors.
• Transferring shares without approval.

11. Resignation and Appointment of Directors

The director and shareholders agreement should also address the processes for the resignation and appointment of directors, ensuring a smooth transition and maintaining the continuity of the company's governance.

12. Share Transfer Protocols

A director and shareholder agreement should also address the protocols for transferring shares, including the involvement of family members and valuation methods can be applied. In this way, ownership interests in the company can be sold or transferred in a fair and transparent manner

13. Insurance Considerations

Consider including provisions for key man insurance and travel insurance to protect the business against unforeseen circumstances affecting key personnel.

14. Share Transfer Upon Death

An agreement should specify how shares will be transferred in the unfortunate event of a shareholder's death. This will ensure a smooth transition and continuity of the company.

15. Dispute Resolution

The agreement should outline the process for resolving disputes, including who will arbitrate and which laws will govern the agreement. This is crucial for maintaining harmony and ensuring that conflicts are resolved efficiently.

16. Duration and Termination

Finally, the agreement should specify its duration and the conditions for revision, amendment, or termination. This provides clarity on the longevity of the agreement and the circumstances that may lead to its dissolution.

To conclude, a well-drafted director and shareholder agreement is essential for SMEs. It clarifies roles and responsibilities while protecting the interests of all parties. By addressing these key points, small businesses can foster a collaborative environment.

Disclaimer Clause

The information provided in this blog is general in nature and is not intended to provide legal advice. Please seek independent legal advice from a qualified lawyer before making any decisions or entering into any agreements related to director and shareholder agreements. Neither the author nor publisher assume any liability for direct, indirect, or consequential losses or damages arising from the use of this blog's information.

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As Chartered Accountant, I strongly recommend that readers consult a qualified legal professional before entering into any directors’ or shareholders’ agreements.