Do You Need a Shareholder Agreement When Setting Up a Company?

Many founders set up their company without realizing how important a shareholder agreement is, until it’s too late. If you’re unsure whether it applies to your situation, don’t worry. We’re here to walk you through it. 

Read on to find what you actually need and why it matters!

Why is a Shareholder Agreement Important?

A shareholder agreement is your business’s safety net. It sets clear expectations between shareholders and guides how the company is managed. When the unexpected happens, shareholder agreement keeps things fair.

If you’re starting up with other co-founders or investors, and even starting a startup, you must consider having a shareholder agreement. Here’s why many founders choose to have one:

• It keeps everyone aligned and protected, without one, disagreements between co-founders or investors can quickly turn personal, costly, and hard to resolve.
• It protects minority shareholders, ensuring that no one can take control unfairly by granting beto rights, tag-along rights, and pre-emption rights.
• It outlines the decision making process to ensure that your business runs smoothly, even when there are disagreements.
• It also helps keep things fair when it comes to buying or selling shares, with clear rules that everyone agrees on.
• It clarifies next steps when someone exits or new shareholders join.

Is a Shareholder Agreement Legally Required for Every Startup?

No, a shareholder agreement is not legally required for every startup in Singapore. You can register your company without one, and there are no penalties for not having it. But know that skipping it can leave you vulnerable to conflict later.

You might need one if you’re the sole owner. However, once multiple shareholders are involved or external investors come in, having a shareholder agreement becomes essential to prevent disputes, protect each party’s rights, and ensure smooth decision-making.

What Should be Included in a Shareholder Agreement?

Getting this right can save you from major headaches later. Here’s exactly what you need to include in shareholder agreement:

1. Shareholder Details and Ownership Structure

Begin by clearly identifying all shareholders and detailing their ownership stakes. This includes:

• Clearly list the shareholder names, addresses, and contact details
• Clarify what type of shares each shareholder holds (like common or preferred) and their ownership percentages.
• Give a detailed table outlining the total number of shares issued, the number of shares held by each shareholder, and the percentage ownership. 

2. Roles, Rights and Responsibilities

Define the scope of each shareholder’s involvement:

• Define who can vote on decisions and what matters require majority approval or a unanimous decision.
• Specify who has the authority to make decisions on behalf of the company and under what circumstances.
• Detail any obligations shareholders have towards the company, such as non-compete clauses or confidentiality agreements, to make sure there is no room for misunderstanding.

3. Share Transfer Rules

Set guidelines for transferring shares to maintain control and protect existing shareholders:

• Specify any restrictions on the shares transfer.
• Allow existing shareholders to buy shares before they’re made available to outside parties.
• Define the conditions under which minority shareholders can join a sale (tag-along) or be compelled to sell their shares (drag-along).
• Describe the process for mapping out the shares value in the case of a sale or transfer.

4. Decision Making and Governance

Outline how decisions are made and who holds authority:

• Specify the number of directors and how they’re appointed or removed.
• Detail the meeting frequency, notice requirements, and quorum conditions.
• Identify specific decisions that need shareholder approval, such as mergers, acquisitions, or significant financial commitments.
• Set mechanisms to resolve deadlocks, such as mediation or arbitration.

5. Minority Shareholder Protections

Ensure fair treatment for all shareholders:

• Allow minority shareholders the right to veto certain decisions that may harm their interests.
• Guarantee minority shareholders have access to company records and financial statements.

6. Exit Strategies

Plan for potential exits:

• Detail the conditions where the company can repurchase shares from shareholders.
• Specify events that require a shareholder to sell their shares.
• Outline the steps for winding up the company if necessary.

7. Dispute Resolution

Address potential conflicts proactively:

• Specify that disputes will be resolved through mediation or arbitration before involving legal action.
• Specify the jurisdiction or location where disputes will be handled.

8. Confidentiality and Non-Compete Clauses

Protect sensitive information and company interests:

• Prevent shareholders from sharing confidential company information.
• Restrict shareholders from engaging in competing businesses, especially after their departure, for a defined time.

9. Capital Contributions and Financing Obligations

Clarify financial commitment:

• Record each shareholder’s initial investment in the company.
• Clarify expectations for any future capital contributions or funding rounds.
• Describe how the company can take on and repay loans or debt.

10. Profit and Loss Distribution

Define how profits and losses are shared to prevents misunderstanding:

• Define how and when profits will be distributed among shareholders.
• Agree on how losses will be handled.

11. Amendment and Termination Procedures

Provide flexibility for future changes:

• Specify how changes to the agreement can be made, such as requiring a supermajority vote.
• Outline the circumstances where the agreement can be terminated.

When and How to Draft a Shareholder Agreement

The best time to draft a shareholder agreement is before conflict begins.

Drafting shareholder agreement is most helpful when:

• The company first formed. So everyone starts with the same expectations and trust is built early.
• Before investors join because it will help you avoid legal confusion by clearly defining investor rights, exit options, and profit-sharing.
• When new partners come in and during early stages. The agreement helps with setting roles, shares, or direction shift.

Once that is clear, you’re ready to draft your shareholder agreements. Here’s how to start:

• Get clear on your shared goals. What kind of business are you building?
• Gather the basics such as who owns what, what will each person contribute, and what does each person expect.
• Talk through the key issues. Discuss things like who makes decisions and how, how shares can be sold or transferred, what happens if someone wants out, how disagreements will be handled, how profits and losses are shared.
• Work with a lawyer you trust because a good one will explain your options.
• Review and sign together. Make sure everyone understands and agrees before moving forward.
• Revisit it regularly. Businesses grow and shift and your agreement should grow with it.

What Happens If You Don’t Have a Shareholder Agreement?

Without a shareholder agreement, you risk unclear expectations among shareholders. Disagreements can escalate without clear rules, leading to deadlocks, stalled decisions, or costly legal battles. You also risk unfair treatment of minority shareholders, unclear share transfers, and no plan for exits or buyouts.

Take the Next Step to Protect Your Business

Even the strongest partnerships can fall apart without a proper shareholder agreement. Better to be prepared than to fix things later. If you’re just starting or planning your next big business breakthrough, One Tax CM is here for you.

We have helped countless founders like you confident about their shareholder agreements, and  we would love to help you too. Visit our website at www.onetaxcm.com and explore how we can help.  

FAQ

1. What is a shareholders agreement?

A shareholders agreement is a private contract between shareholders that sets clear rules on how the business is run, who makes decisions, and what happens if there’s a conflict.

2. Who should sign a shareholders agreement?

All shareholders should sign it and new ones need to sign too when they join. Only those who sign are legally bound by the terms.

3. Can a shareholders agreement be changed?

Yes, but everyone involved must agree to any changes.

4. How is dispute resolution handled?

Most agreements typically include mechanisms like mediation or arbitration to resolve conflicts privately and efficiently.

5. What law governs shareholders agreements in Singapore?

Shareholders agreements in Singapore are governed by Singapore law. Most disputes are handled here too.