Companies often operate with a clear division between majority and minority shareholders. Ideally, they should unite behind a common purpose of driving success and growth.
However, in my experience as a corporate lawyer, I’ve seen the relationship between these two groups grow tense as majority shareholders exert their influence.
When consistently outvoted, minority shareholders (owning under 50% of shares) may experience exclusion and unfair treatment. This is known as “minority oppression” and refers to prejudicial actions taken by majority shareholders.
In Singapore, safeguarding minority shareholder rights is crucial. A shareholder agreement can be the key to protecting your interests. It provides a structured framework outlining everyone’s rights and responsibilities, offering protection against potential abuses of power.
The essential terms of a minority shareholder agreement
Know your rights and responsibilities
A minority shareholder agreement spells out each shareholder’s rights and responsibilities, leaving little room for ambiguity. This clarity is crucial to prevent misunderstandings and potential conflicts that lead to minority oppression.
Some of them are:
- Voting rights: How votes are allocated, which decisions require majority or unanimous consent.
- Decision-making: Who has the final say on daily operations, strategic direction, and major investments?
- Management roles: Any shareholder entitlements to management roles, authority and remunerative package
- Profit distribution: How profits and dividends are allocated, whether there is a set schedule or formula, and the rights of management to profits.
- Other rights: Consider pre-emptive, tag-along, and drag-along rights
Protecting against unilateral decision-making
To protect minority shareholders, the agreement should include mechanisms requiring consensus or a higher level of agreement than a simple majority before making significant decisions. This prevents majority shareholders from making decisions that negatively affect minority shareholders.
Safeguards to get around being sidelined:
- Giving minority shareholders the power to block certain decisions, even if the majority agrees.
- Requiring a higher percentage of shareholders to agree (e.g., 75% or 80%) for certain actions.
- Listing specific decisions (Reserved matters) that cannot be made without the approval of all shareholders, or a certain percentage of minority shareholders.
Dispute resolution
You want to avoid ending up with a costly legal battle when disagreements arise. Your shareholder agreement should include a clear plan for resolving disputes outside court. This might involve mediation, arbitration, and other methods like negotiation or collaborative law might be suitable.
Exit strategies
Shareholder agreements must outline clear exit strategies, such as a right to sell shares, even if other shareholders disagree, along with a fair valuation mechanism, such as an independent appraisal or pre-agreed formula.
The agreement should also detail the process for selling shares, covering aspects like notice periods, rights of first refusal for other shareholders, and any restrictions on the sale.
If minority oppression occurs, the shareholder agreement may include a provision allowing affected shareholders to exit the company with fair compensation for their shares.
Take control of your future with a shareholder agreement
Don’t leave your rights to chance. Take the next step and have a shareholder’s agreement.
