Is A Shareholder Agreement Necessary When Setting Up?
What Is A Shareholder Agreement?
A shareholder agreement is an essential and often overlooked document for businesses with multiple shareholders. It establishes the rights and responsibilities of the business’s investors or shareholders, outlining how decisions will be made in proportion to a shareholder’s percentage of ownership. Shareholder agreements also establish how dividend payments should be split between shareholders, along with details such as voting rights, what happens if one of the shareholders wishes to leave or sell their shares in the future, and much more. This type of agreement is a valuable tool for protecting both investors and business owners’ interests. The shareholder agreement can also be supplementary to the company’s constitution, where rules and regulations can be implemented, for those not included in the constitution.
Is A Shareholder Agreement Mandatory?
A shareholder agreement outlines the rights and responsibilities of people with a stake in the company. Despite this, a shareholder agreement is optional – depending on the type and size of the business, such an agreement may or may not be required. Generally speaking, larger firms with multiple stakeholders and shareholders are likely to benefit from a formal agreement outlining decision-making procedures and potential disputes that might arise between the owners in the future. While smaller entities or those with just one or two owners can still enter into a partnership contract if both parties feel that could protect their rights better moving forward. That said, whether to sign or forego a shareholder agreement depends on how much risk each party is willing to take and how uniform they want their understanding of business operations to be.
Nonetheless, it is still greatly encouraged for companies to have a shareholder agreement arranged for should there be more than one shareholder involved. In the case of incorporated companies in Singapore, doing without a shareholder agreement is very rare.
Why Is A Shareholder Agreement Needed?
As society has become increasingly litigious, it is more important than ever to consider protecting your business through a shareholder agreement. The document stipulates expectations for governance, management and ownership of the company. A well-crafted and executed shareholder agreement can safeguard against future disputes and misunderstandings by providing clear guidelines for handling issues related to the company’s finances and operations. By having a legally binding contract that governs all parties involved in a business venture, shareholders can rest assured that everyone involved is aware of their rights and obligations – reducing the potential for costly litigation down the line.
The shareholder agreement only binds those who have signed it and, thus, can only have changes made by the parties involved in the contract. Unlike the company constitution, which was made available for public access, the shareholder agreement is solely for private viewing only, retaining its confidentiality. The agreement may not be necessary at the time of a company’s incorporation, but there are several valid reasons why you should:
Protecting the interests and defining roles of shareholders
Protecting shareholders’ interests is an essential aspect of corporate governance. A shareholders agreement helps to ensure that the shareholders have a mutual understanding of the rights and obligations they hold regarding the company. It is a contract between shareholders outlining their legal rights, obligations and responsibilities to each other and the company. As part of this agreement, shareholders must agree on things like dividends, changes in the company’s capital structure, transferability of shares, dispute resolution and when decisions need unanimous approval. All shareholders should be willing to enter into a shareholder’s agreement with careful consideration given so that all parties achieve fair outcomes. By taking proactive steps such as creating a shareholder’s agreement, shareholders can protect their interests without placing unnecessary burdens on the business. This will ensure that shareholders who wish to buy into the company will be informed about what they will be involved with.
Additionally, the shareholder’s agreement should allocate a quorum representing the minimum number of shareholders needed to make valid corporate decisions to protect minority shareholders, preventing the majority shareholders from violating their rights. Overall, it is important for shareholders to create an agreement that accurately reflects the interests of each party.
Establish a clear decision-making process
Establishing a clear decision-making process is critical for the success of any business. When shareholders agree on the chain of command and level of authority within the company, it helps reduce confusion, improve communication, and avoid legal issues that could arise when decisions are made without proper oversight or, worse, without shareholders’ agreement. A shareholders agreement stipulating who has the final say regarding specific issues will save time and frustration and ensure that shareholders have a unified direction for their business. Creating a straightforward decision-making process is beneficial to everyone involved – shareholders, company employees, and customers – so taking the time to implement one is well worth it.
Providing a plan for the future
Drafting a shareholder’s agreement that is tailored to your business can provide the framework for a secure foundation for the future. This document outlines the rights and responsibilities of each partner, thus ensuring all shareholders are on the same page when it comes to decision-making and decision implementation. It also allows shareholders to plan ahead by addressing potential risks associated with running a business, such as disputes over roles and responsibilities or financial instability arising from an unprecedented decline in sales. Taking the time to create an effective shareholders agreement can be a crucial step toward preparing your business for success in the years to come.
At the end of the day, the choice of forming a shareholder’s agreement at the beginning of your company’s incorporation will be up to you. It may not be compulsory to have one in the beginning, but the safeguards that it will instil can be the deciding factor in the overall flow of the company as time goes by.