(Sec update) Top 5 Crucial Clauses in Shareholders' Agreement

One or more business partners incorporating a company may seem like a straightforward process that does not require any agreement. However, some of the shareholders may want to consider entering a shareholder’s agreement, especially if you are a minority shareholder in the company.

Although the Companies Act 2016 does provide some protection for shareholders, such as oppression of minority shareholders. When shareholders sign a Shareholders Agreement (SHA), the court typically gives it priority, as the SHA reflects the final intent of the parties' relationship nature.

If “Without” an SHA, it may be more challenging to find legal grounds to make a claim, as the protections provided by the company's constitution may be insufficient.

Leverage our 25 years of unparalleled company secretarial experience to uncover the five (5) indispensable clauses that can make or break your Shareholders' Agreement. Don't embark on your business journey without this invaluable knowledge.

Top 5 Clauses in Shareholders’ Agreement

We have pointed out the following five common clauses in a Shareholders' Agreement (SHA) that may help to protect your rights as a minority shareholder:

1. Reserved Matters

In the SHA may state the reserved matters that require unanimous voting by the company. This clause is crucial for minority shareholders, providing protection against the majority shareholders' rights (who are likely to win with a majority vote at company meetings).

Examples of reserved matters such as include changes in the company's business, an increase in the company's share capital (which dilutes everyone's ownership), exercising borrowing powers (such as obtaining substantial loans from banks), or creating security interests (such as registering a charge on company assets).

2. Shareholder Obligations

Each Shareholder's obligations in the company can be clearly defined in the SHA. Such as a common clause states, "Shareholders shall act in the best interests of the company." If each shareholder provides different contributions, this clause helps specify individual obligations.

For example, Mr. A is obligated to invest funds in the company; Mr. B has to contribute his/her expertise in certain areas, maybe in terms of knowledge or skills; and Mr. C, with decades of management experience, oversees and implements various company projects.

3. Directors

Companies usually have an odd number of directors to prevent deadlock situations. For some situations, the majority shareholders may appoint directors count tends to favor them in maintaining control at the executive level.

However, minority shareholders should insist on the right to appoint at least one director by adding this clause in the SHA, ensuring representation on the board allows easy oversight of company operations and protects minority shareholder interests.

4. Equity Transfer

To ensure clear provisions when another shareholder wishes to exit the company, this is preventing potential co-ownership with your competitor. It's crucial to explicitly outline (Exit Conditions) such details in the shareholders' agreement.

Another key provision is the purchase price for the existing shareholder's shares. The Shareholders may state the selling price in the SHA as agreed upon among the Shareholders for whoever exits the company in a certain time. Unless the exiting shareholder agrees to give up shares at the initial investment price (often impractical), some valuation mechanism may be necessary. However, valuing a company can be costly.

Specific clauses like pre-emptive rights, tag-along rights, drag-along rights, and drag-with rights exist and may be included in the SHA but may not be necessary, especially for small to medium-sized enterprises.

5. Dispute Situation

Dispute resolution clauses provide shareholders with options to resolve conflicts among them. For instance, a shareholders' agreement may include an arbitration clause, meaning any disputes must be resolved through arbitration rather than litigation in court.

However, as a minority shareholder, caution should be exercised before agreeing to an arbitration clause unless you fully understand its implications.

In conclusion, shareholders' agreements are common and can effectively protect the interests of all involved shareholders, especially minorities. Even if a company did not initially sign such an agreement, there's nothing stopping shareholders from subsequently doing so.

PS : Authored by Hui Ting, our secretary associate in THK, in her personal LinkedIn post

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