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Why some shy away from Shareholders’ Agreements

Patrick Lim
Partner at Raj, Ong & Yudistra

A shareholders’ agreement is a commonly used tool in today’s business landscape, especially in the startup culture, venture capital investments, and activist investing. It plays a crucial role in ensuring clear corporate governance. Here are some key points to know about shareholders’ agreements:

  • The Companies Act 2016 and its regulations cover most issues related to running a company, but a shareholders’ agreement is typically used to address matters not explicitly covered by the Act.
  • It is not mandatory to have a shareholders’ agreement in a company.
  • The agreement can be signed by some shareholders and not necessarily all of them.
  • It outlines how shareholders will interact with each other.
  • Shareholders cannot be compelled to sign the agreement.
  • The agreement can be established at any point during the company’s existence.

However, it’s worth considering why some business people choose not to have shareholders’ agreements in place. Seasoned and established business individuals, particularly significant majority shareholders, may perceive such agreements as diminishing their power. In traditional businesses with large majority shareholders, shareholders’ agreements are often absent.

As a majority shareholder, you possess substantial voting power, enabling you to make critical decisions for the company. If you can exercise control without facing significant opposition from other shareholders, the need for a formal agreement may be reduced. Additionally, the Companies Act 2016 provides an improved legal framework for corporate governance.

Shareholders’ agreements are typically established to protect the investments of minority shareholders, aside from joint ventures or specific purpose vehicles. Therefore, as a majority shareholder, your decision may hinge on the extent of rights you are willing to grant to minority shareholders.

If you decide to pursue a shareholders’ agreement, it should be driven by long-term considerations and management of expectations. The agreement should address difficult questions, outline clear controls on management and spending, and manage expectations among parties involved. It can also establish provisions for future shareholders to adhere to the same rules.

Ultimately, a well-crafted shareholders’ agreement can foster a lasting business relationship by bringing parties together and setting ground rules.

While there are comprehensive articles available that delve into the mechanics and essential terms of shareholders’ agreements, seeking legal assistance is advisable if you require a well-crafted agreement or guidance on relevant provisions for your specific setup. Legal professionals can help ensure consistency between the terms of the agreement and the company’s Constitution, if applicable.

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