A company’s constitution is regarded as a statutory contract between the shareholders. In practice, shareholders often supplement the constitution with a separate agreement setting out their rights and obligations, before or after incorporating a company to conduct their business. These agreements are often comprehensive, dealing with rights and obligations in addition to those in the company’s constitution. Such an agreement is usually referred to as a “shareholder agreement”, and may be between:
- The company and its members.
- All the members amongst themselves.
- Select members amongst themselves.
There is no fixed rule on the scope of a shareholder agreement — the parties are free to determine what it covers based on their needs. Some companies have a simple, streamlined agreement, while others have a comprehensive agreement with detailed terms covering every aspect of the company’s operations. Generally, a well-drafted shareholder agreement will cover (but is not limited to) the following:
What a Shareholder Agreement Typically Covers
- Management of the company — who will exercise the management functions of the company, and the mechanism by which certain decisions are made (for example, unanimous approval or approval of a specified percentage) to protect the interests of minority shareholders who could otherwise be outvoted.
- Dispute/deadlock resolution — if a dispute or deadlock arises between shareholders and they are unable to keep working together, the agreement can minimise the time and cost of the dispute by dictating who should leave, the price of their shares, and when the sale takes effect.
- Exit strategy — how shareholders can sell their shares and how the shares will be valued.
- Disability or death of a shareholder — whether the company continues to pay a full or reduced salary if a shareholder is disabled, and for how long, and whether the disabled shareholder is required to sell their shares; and how a deceased shareholder’s next-of-kin are compensated for the deceased’s interest in the business.
- Non-competition provisions — protecting the company’s interests by preserving confidential information and restricting founders from leaving to join or start a competitor.
- Return on investment — the company’s dividend policy.
Shareholder Agreement vs Company Constitution
The statutory contract created by a company’s constitution is distinct and separate from any shareholder agreement between the parties. As a result, there may be two contracts governing the relationship between the parties, both equally binding with their own legal force. Where the two documents conflict, the conflict is generally resolved using general principles of contract law interpretation, since courts apply the same contractual rules of interpretation when construing corporate constitutional documents.
There are two key differences between the constitution and a shareholder agreement:
- Membership. The rights and obligations of the statutory contract are inextricably tied to membership of the company — a party who ceases to be a member also ceases to be a party to the statutory contract, while new members who join the company become parties to it automatically. The rights and obligations in a shareholder agreement, by contrast, are personal to the original parties and can only be assigned in accordance with the rules of contract law.
- Amendment. The statutory contract can be amended so long as the procedures for amending the company’s constitution are followed — under most circumstances this requires only a requisite majority, not the agreement of every party. In contrast, all parties to a shareholder agreement must agree before any amendment to it can take effect.
This distinction is discussed in Yeo, Victor C.S., Lee, J., Hanrahan, P., Ramsay, I., & Stapledon, G. (2015), Commercial Applications of Company Law in Singapore (5th ed.), at 5-420.