Singapore SHA (2012)

SingaporeDr Nicholas LimKhattarWong LLP1. Are shareholders’ agreements frequent in Singapore?In Singapore, s hareholders’ agreements are frequently used in closely held companies or joint venture companies to regulate the different rights and obligations of shareholders.Where there is no shareholders’ agreement, the relationships of shareholders as between themselves and with the company are governed by the articles of association of the company (“Articles”).2. What formalities must shareholders’ agreements comply with in Singapore?A shareholders’ agreement is a contract between the persons who are parties to it and will be governed by Singapore contract law.3. Can shareholders’ agreements be brought to bear against third parties such as purchasers of shares or successors?As a general rule, only the parties to a contract can sue or be sued under the contract. However, the Singapore Contract (Rights of Third Parties) Act creates certain exceptions to this rule, and allows a third party to enforce a term of a contract against the parties to the contract where (i) the contract expressly gives the third party the right to do so, or (ii) the term purports to confer a benefit on the third party (unless on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party). The application of the Contract (Rights of Third Parties) Act may be excluded, typically by including an express provision to that effect in the contract.Typically, s hareholders’ agreements will require a new shareholder to execute a deed of adherence to confirm his agreementto adhere to the terms of an existing the shareholders’ agreement.4. Can a shareholders’ agreement regulate non-company contents?A s hareholders’ agre ement may regulate any matters which can be legally agreed upon between the parties.5. Are there limits on the term of shareholders’ agreements under the law of Singapore?Singapore laws do not prescribe any limit on the term of a shareholders’ agreement. The term of a sharehol ders’ agreement is a commercial matter to be decided by the parties. S hareholders’ agreement s may contain termination provisions, which provide that the shareholders’ agreement shall b e terminated upon the occurrence of a specified event, for example, when all (or all save for one) of the shareholders cease to be a shareholder in the company.6. Are shareholders’ agreements related to actions by directors valid in Singapore?Under common law, directors of a company owe fiduciary duties to the company. Br oadly speaking, a director’s fiduciary duties encompass the duty to ac t bona fide in the best interests of the company (in this respect, regard may be had to the interests of the members, employees and under certain circumstances, creditors of the company), the duty not to place himself in a position where his interests may conflict with the interests of the company, and the duty to exercise the powers vested in him for proper purposes.The Companies Act fortify the common law position by prescribing that a director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. Further, an officer or agent of a company shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company to gain, directly or indirectly, an advantage for himself or for any other person, or to cause detriment to the company.Shareholders’ agreements may dictate the composition of the board of directors, or provide for board reserved matters (where the approval of a director nominated by a particular shareholder is required for decisions in respect of the reserved matters). However, in exercising their voting rights at board meetings or other powers to act, nominee directors should bear in mind their duties under common law and the Companies Act.7. Does the law of Singapore permit restrictions on transfer of shares? Under the Companies Act, the memorandum or articles of association of a private company must contain restrictions on the right to transfer shares. Please refer to our response to question 8 below for examples of mechanisms to restrict the transfer of shares in private companies.The memorandum or articles of association of a public company must not contain restrictions on the transfer of shares.8. What mechanisms does the law of Singapore permit for regulating share transfers?Shareholders are generally free to agree on the manner in which share transfers are regulated. The following are examples of popular mechanisms for regulating share transfers:(i)Board consentThe consent of the board of directors must be obtained in respect of any transfer of shares. This is the most basic mechanism which a company may adopt for restricting the transfer of its shares.(ii)Right of first refusalA shareholder who wishes to sell his shares must first offer his shares to theother shareholders in proportion to their shareholdings. If the other shareholders do not exercise their rights to buy the shares, the selling shareholder may offer these shares to a third party at the same price and subject to the same conditions.(iii)Tag along rightsWhere a selling shareholder (usually the majority shareholder) wishes to sell all his shares to a third party, the remaining shareholders may exercise their tag along rights, which is the right to compel the selling shareholder to procure that the third party purchaser shall also purchase their shares on the same terms.(iv)Drag along rightsWhere a selling shareholder (usually the majority shareholder) wishes to sell all his shares to a third party, he may exercise his drag along rights, which is the right to compel the remaining shareholders to sell their shares to the third party purchaser on the same terms.(v)Russian rouletteA shareholder may serve notice on another shareholder offering either to buythe shares of the other shareholder or to sell its shares to the other shareholder, at a specified price. The other may accept either of the offers.(vi)Compulsory transferUpon the occurrence of a specified event, a shareholder shall be compelled to transfer all his shares to the remaining shareholders or a third party purchaser approved by the board of directors. Examples of events which may trigger a compulsory transfer of shares include bankruptcy or insolvency, unsoundness of mind, breach of material obligations under the shareholders’ agreement.Under certain circumstances, for example, where the shareholder has been inbreach of his material obligations under the shareholders’ agreem ent, the shareholder may be penalized by a share valuation mechanism which provides that he shall only be entitled to receive a discounted price for his shares.(vii)Permitted transfersPermitted transfers are exceptions to the restrictions on share transfers, which allow shareholders to freely transfer their shares to certain persons. For example, individual shareholders may be permitted to freely transfer shares to their immediate family members; corporate shareholders may be permitted to freely transfer their shares to related companies or affiliates.9. In Singapore do bylaws tend to be tailor-drafted, or do they tend to use standard formats?The Articles of a company incorporated under the laws of Singapore may be in a fairly standard format or a bespoke format. A standard format of Articles is provided in Table A in the Fourth Schedule of the Companies Act; depending on the commercial requirements of the shareholders Articles may adopt all or any of the regulations contained in Table A.10. What are the motives in Singapore for executing shareholders’ agreements?Shareholders may enter into shareholders’ agreements to define their respective rights and obligations in relation to the company and to set out governance arrangements relating to the company. For example, shareholders’ agreements may address matters such as the objectives, business plans and dividend policy of the company, capital commitments of each shareholder, board composition (including the right of certain shareholders to appoint their nominee to the board of directors), quorum for board meetings and shareholders’ meetings, rights of veto by minority shareholders, rights of first refusal and share valuation mechanisms in relation to a proposed transfer of shares.Shareholders may also enter into a shareholders’ agreement to set out private arrangements between themselves, for example: (i) agreements between shareholders not to compete with the company, (ii) voting agreements between the shareholders whereby the shareholders agree to exercise their voting rights in a particular manner or to procure a particular course of action by the company, (iii) call options whereby one shareholder is given the right to purchase the shares held by another shareholder, (iv) put options whereby one shareholder is entitled to sell his shares to another shareholder; and (v) funding commitments.Minority shareholders may safeguard their interests by entering into a shareholders’ agreement with the majority shareholder. A shareholders’ agreement which safeguards the interests of minority shareholders may contain provisions which (i) require their presence to form a quorum at meetings, (ii) give them veto rights in relation to certain matters, (iii) guard against the dilution of their shareholdings.A sh areholders’ agreement has the advantage of being a private document, unlike the Articles which must be registered with the Accounting and Corporate Regulatory Authority of Singapore.11. What contents tend to be included in shareholders’ agreements in Singapore?The following clause s are typically included in shareholders’ agreements:(i)Board composition clause which sets out the number of directors comprising theboard and the manner in which directors are appointed.(ii)Reserved matters clause which sets out the matters which a particular shareholder (or his nominee director in board meetings) is entitled to veto.(iii)Financing clause which sets out the shareholders’ capital commitments or obligations to guarantee loans, if applicable.(iv)Transfer of shares clause which sets out the restrictions and procedures applicable to share transfers (see our response to question 8 above).(v)Events of default clause which set out matters which constitute an event of default and the consequences of such default.(vi)Non-solicitation and non-competition clauses which set out the shareholders’ covenants not to solicit employees, suppliers or clients of the company, and not to engage in any business that competes with the business of the company. (vii)Conflict with Articles clause which provides that in the event of conflict between Articles and the shareholders’ agreement, the share holders agreement will prevail.12. What determines the content included in shareholders’ agreements in Singapore?The content of a shareholders’ agreem ent depends largely on the commercial objectives of the parties.Please refer to our response to question 11 above for clauses that are commonly included in shareholders’ agreements.13. What are the most common types of clauses in shareholders’ agr eements in Singapore?Please refer to our response to question 11 above for clauses that are commonly included in shareholders’ agreements.14. What mechanisms does the law of Singapore permit to ensure participation of minorities on the board of directors and its control?For purposes of a shareholders agreement, it may provide that: (i) the minority shareholder shall be entitled to nominate its representative to the board of directors, (ii) at board meetings, the director appointed by the minority shareholder shall be present in order to form a quorum, and (iii) the director appointed by the minority shareholder shall have the right of veto in relation to decisions by the board in respect of specified matters.15. Is it possible in Singapore to ensure minority shareholder control by means of a shareholders’ agreement?In Singapore, it is possible for a minority shareholder to have actual or deemed control of a company by means of a shareholders’ agreement. This can be achieved if the shareholders’ ag reement provides that: (i) the minority shareholder is entitled to appoint the majority of directors to the board, (ii) the minority shareholder is entitled to appoint its nominees to key management positions, and (iii) the minority shareholder shall be entitled to veto decisions by the other shareholders.16. What are the usual valuation mechanisms in connection with rights of first refusal or share transfer regulations?The Articles and/or shareholders’ agreement typically provide for a share valuation mechanism in connection with share transfers.In the case of a voluntary transfer of shares, the share price is typically: (i) set by the shareholder who proposes to sell his shares, (ii) determined based on a pre-agreed formula, or (iii) a “fair and reasonable price”or “market value” as determined by an independent third party such as an auditor.The Articles or shareholders’ agreement may also provide for the compulsory transfer of shares by a shareholder under certain circumstances (for example, where the shareholder is in material breach of his obligations under the shareholders’ agreement) and may penalize the shareholder by providing that he shall only be entitled to receive a discounted price for his shares.17. Is it admissible for a share holders’ agreement clause to refer dispute resolution to the courts other than those of Singapore and/or under a law other than that of Singapore?Yes. A shareholders’ agreement may contain a choice of court clause that provides that any disputes arising from the agreement shall be resolved by the courts of the country chosen by the parties. A shareholders’ agreement may also include agoverning law clause to state the agreement shall be governed by laws of a country other than Singapore.18. Is it adm issible for a shareholders’ agreement to include an arbitration clause with seat outside Singapore and/or under a law other than that of Singapore?Yes. A shareholders’ agreement may contain an arbitration clause that provides that any disputes arising from the agreement shall be resolved by arbitration with a seat outside Singapore. A shareholders’ agreement may also include a governing law clause to state the agreement shall be governed by laws of a country other than Singapore.。