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  • Writer's pictureCarmen Lai

THE IMPORTANCE OF SHAREHOLDERS’ AGREEMENT

In the world of business, where relationships, ambitions and stakes intertwine, the shareholders’ agreement serve as the backbone of corporate governance which outlines the rights, responsibilities and obligations of shareholders within a company. A well-crafted shareholders' agreement acts as a safeguard against potential disputes that could jeopardize the stability and growth of the company.

 

The need for a shareholders' agreement is not limited to a specific type or size of the company. Any business entity, from startups to joint ventures or even companies planning for expansion can benefit from having a shareholders’ agreement in place.

 

As these companies grow, the complexity of their operations and the number of stakeholders involved increases, making it essential to have clear guidelines in place for governance, decision-making and addressing conflicts of interest. A shareholders’ agreement can help align the interests of all parties involved, establish procedures for decision-making and outline exit strategies in the event of any potential dispute between the parties.

 

A shareholders' agreement typically includes clauses tailored to the specific needs and circumstances of the company and its shareholders. The following are some essential clauses commonly found in shareholders' agreements:

 

Share Ownership and Transfer Restrictions: This clause outlines the details of share ownership, including the percentage of shares held by each shareholder and any restrictions on the transfer of shares. Transfer restrictions may include rights of first refusal, pre-emption rights or limitations on selling shares to third parties without the consent of existing shareholders.

 

Board Composition and Appointment: This clause specifies the composition of the board of directors, including the number of directors and any requirements for representation of certain shareholder groups.

 

Management and Decision-making: This clause specifies the procedures for decision-making within the company. By identifying specific matters that require approval or consent from designated parties, reserved matters clauses help prevent unilateral decision-making by individual shareholders or directors and promote transparency and accountability in corporate governance.

 

Succession Planning: This clause outlines procedures for succession planning, including provisions for the transfer of shares upon the death or incapacity of a shareholder.

 

Exit Mechanisms: This clause is crucial for providing shareholders with options for liquidity and exit strategies. Common exit mechanisms include buy-sell provisions, drag-along and tag-along rights in the event of a sale of the company.

 

Each shareholders' agreement is a bespoke document crafted to address the specific needs, preferences and objectives of the parties involved. Relying on a template agreement without professional advice and legal guidance risks neglecting crucial considerations and could lead to oversights or disputes down the line.


By,

Carmen Lai &

Mike Lee Seang Yik

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