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Introduction
When starting a company, founders often prioritise other matters and may unintentionally overlook the importance of having a shareholders’ agreement. At the outset, such formal agreements may seem unnecessary when everyone appears aligned. However, this optimism may not reflect future realities. While shareholder disputes are not entirely avoidable, a well-drafted shareholders’ agreement can significantly reduce the risk of legal conflicts, safeguard relationships, and protect the company.
This article examines two reported cases in Singapore where the absence and inadequacy of a shareholders’ agreement led to serious internal disputes and highlights how a proper shareholders’ agreement could have assisting in
resolving these disputes better.
When starting a company, founders often prioritise other matters and may unintentionally overlook the importance of having a shareholders’ agreement. At the outset, such formal agreements may seem unnecessary when everyone appears aligned. However, this optimism may not reflect future realities. While shareholder disputes are not entirely avoidable, a well-drafted shareholders’ agreement can significantly reduce the risk of legal conflicts, safeguard relationships, and protect the company.
This article examines two reported cases in Singapore where the absence and inadequacy of a shareholders’ agreement led to serious internal disputes and highlights how a proper shareholders’ agreement could have assisting in
resolving these disputes better.
CASE STUDY 1:
Oppression of Minority Shareholders
Lim Swee Khiang and another v Borden Co (Pte) Ltd and others [2006] SGCA 33
Background
Company A was formed by six close-knit families to succeed in the pharmaceutical trade, with a popular medicated oil under a famous brand. Each family was represented on the board of directors (“the Board”).
A related company, Company B, run by one of the directors, Mdm. H, and her son, was licensed to distribute the medicated oil overseas in return for royalties.
Dispute
Company B expanded into several other markets but stopped paying the agreed royalties. Rather than enforcing the licensing agreement as part of their duty to prioritise Company A’s interests, Mdm. H and those who supported her on the Board (collectively holding 73% of the total shares) (“the majority”) ignored the breach. They even settled a lawsuit filed by Company B to cancel Company A’s trademark despite Company A holding a stronger legal position. Gradually, Company A’s market position weakened and its sales declined.
When the other shareholders (collectively holding 27% of the total shares) (“the minority”) wanted to terminate Company B’s license and recover unpaid royalties, Mr. L, being one of the minority, was removed from his executive role without explanation at a shareholders’ meeting, locking him out of any decision- making.
Mr. L hence commenced legal proceedings on the behalf of the minority, alleging that the majority had acted unfairly and prioritised Company B’s interests over Company A’s to the minority’s detriment.
Outcome
The High Court dismissed Mr L’s claim as a mere difference in business philosophy and labelled the suit an abuse of process, noting that the minority had refused a buyout offer.
However, the Court of Appeal reversed High Court’s decision. As Company A was operated like a quasi- partnership where fairness was essential, it was ruled that Mr. L’s removal was unjustified and that the majority had disregarded the minority’s interests. They also found the buyout offer unreasonable as it did not reflect the losses caused by the majority’s oppressive acts.
Concluding that winding up should be a last resort, the Court of Appeal ordered the majority to buy out the minority’s shares at fair value determined by an independent valuer to reflect the damage done by the majority.
Oppression of Minority Shareholders
Lim Swee Khiang and another v Borden Co (Pte) Ltd and others [2006] SGCA 33
Background
Company A was formed by six close-knit families to succeed in the pharmaceutical trade, with a popular medicated oil under a famous brand. Each family was represented on the board of directors (“the Board”).
A related company, Company B, run by one of the directors, Mdm. H, and her son, was licensed to distribute the medicated oil overseas in return for royalties.
Dispute
Company B expanded into several other markets but stopped paying the agreed royalties. Rather than enforcing the licensing agreement as part of their duty to prioritise Company A’s interests, Mdm. H and those who supported her on the Board (collectively holding 73% of the total shares) (“the majority”) ignored the breach. They even settled a lawsuit filed by Company B to cancel Company A’s trademark despite Company A holding a stronger legal position. Gradually, Company A’s market position weakened and its sales declined.
When the other shareholders (collectively holding 27% of the total shares) (“the minority”) wanted to terminate Company B’s license and recover unpaid royalties, Mr. L, being one of the minority, was removed from his executive role without explanation at a shareholders’ meeting, locking him out of any decision- making.
Mr. L hence commenced legal proceedings on the behalf of the minority, alleging that the majority had acted unfairly and prioritised Company B’s interests over Company A’s to the minority’s detriment.
Outcome
The High Court dismissed Mr L’s claim as a mere difference in business philosophy and labelled the suit an abuse of process, noting that the minority had refused a buyout offer.
However, the Court of Appeal reversed High Court’s decision. As Company A was operated like a quasi- partnership where fairness was essential, it was ruled that Mr. L’s removal was unjustified and that the majority had disregarded the minority’s interests. They also found the buyout offer unreasonable as it did not reflect the losses caused by the majority’s oppressive acts.
Concluding that winding up should be a last resort, the Court of Appeal ordered the majority to buy out the minority’s shares at fair value determined by an independent valuer to reflect the damage done by the majority.
CASE STUDY 2:
Breach of Directors’ Duties
Ng Tang Hock v Teelek Realty Pte Ltd and others [2020] SGHC 214
Background
Mr. H and Mdm. L co-founded a real estate investment company (“the Company”), each owning 50% of the shares. Their two children later joined the business as directors (“the children”). Following a divorce, Mr. H resigned from the board, while retaining his shareholding in the Company. Mdm. L, along with the children, took over the board.
Dispute
Mdm. L then reclassified around S$12.5 million of loans made by Mr. H to the Company as her own, and withdrew those funds from the Company’s account. She had also transferred shares to the children in breach of the Company’s Articles of Association. She further blocked Mr. H’s access to financial records of the Company and convened an Annual General Meeting to issue new shares without going through proper procedure.
As such, Mr. H hence took legal action against Mdm. L and the children to claim for the repayment of the S$12.5 million, cancel the share transfers, remove Mdm. L and the children as directors, and alleged oppression in relation to the conduct of the Company’s affairs.
Outcome
The court found that the loan reclassification and withdrawal of S$12.5 million was unauthorised and wrongful. There was inconsistency and/or no proof in evidence by Mdm L. of a valid waiver by Mr. H. Mdm. L’s share transfers to the children were also invalid as the action breached the Company’s Articles of Association and Mr. H’s right of first refusal.
The court also found that Mdm. L breached her director’s duty as she misappropriated the Company’s funds for personal use, withheld Mr. H’s access to audited accounts, and improperly convened an Annual General Meeting to issue new shares. The children, having followed Mdm. L’s instructions, also breached their duties as directors.
The court classified this conduct as commercial unfairness that clearly breached the “fair dealing” shareholders should expect in a company. Given the complete breakdown in trust and poor corporate governance, the court ordered the Company to be wound up as it was the fairest way to ensure transparency, accountability, and a clean break between the parties. Additionally, Mdm. L was ordered to return the withdrawn funds.
Breach of Directors’ Duties
Ng Tang Hock v Teelek Realty Pte Ltd and others [2020] SGHC 214
Background
Mr. H and Mdm. L co-founded a real estate investment company (“the Company”), each owning 50% of the shares. Their two children later joined the business as directors (“the children”). Following a divorce, Mr. H resigned from the board, while retaining his shareholding in the Company. Mdm. L, along with the children, took over the board.
Dispute
Mdm. L then reclassified around S$12.5 million of loans made by Mr. H to the Company as her own, and withdrew those funds from the Company’s account. She had also transferred shares to the children in breach of the Company’s Articles of Association. She further blocked Mr. H’s access to financial records of the Company and convened an Annual General Meeting to issue new shares without going through proper procedure.
As such, Mr. H hence took legal action against Mdm. L and the children to claim for the repayment of the S$12.5 million, cancel the share transfers, remove Mdm. L and the children as directors, and alleged oppression in relation to the conduct of the Company’s affairs.
Outcome
The court found that the loan reclassification and withdrawal of S$12.5 million was unauthorised and wrongful. There was inconsistency and/or no proof in evidence by Mdm L. of a valid waiver by Mr. H. Mdm. L’s share transfers to the children were also invalid as the action breached the Company’s Articles of Association and Mr. H’s right of first refusal.
The court also found that Mdm. L breached her director’s duty as she misappropriated the Company’s funds for personal use, withheld Mr. H’s access to audited accounts, and improperly convened an Annual General Meeting to issue new shares. The children, having followed Mdm. L’s instructions, also breached their duties as directors.
The court classified this conduct as commercial unfairness that clearly breached the “fair dealing” shareholders should expect in a company. Given the complete breakdown in trust and poor corporate governance, the court ordered the Company to be wound up as it was the fairest way to ensure transparency, accountability, and a clean break between the parties. Additionally, Mdm. L was ordered to return the withdrawn funds.
Key Takeaways
The case studies illustrate how the absence of a properly drafted shareholders’ agreement can give rise to costly disputes, irreparably damaged stakeholder relationships, and, in extreme cases, lead to the winding up of the company.
Key provisions should include safeguards for minority shareholders, such as fair buy-out mechanisms and deadlock resolution clauses, which provide structured exit routes when relationships fall apart. The agreement should also clearly define the roles, responsibilities, and rights of shareholders and directors, ensuring that there is basis to address commercially unfair conduct where necessary.
Procedural clauses are as equally essential, covering areas such as the appointment and removal of directors, share transfer processes and restrictions, and dispute resolution mechanisms.
Conclusion
When properly drafted, a shareholders’ agreement serves as an essential governance instrument over and above the constitution that protects the interests of all parties and supports the long-term stability of the company.
We have compiled a checklist of key clauses that should be considered by founders for inclusion in any well-structured shareholders’ agreement.
If there are any queries on shareholder issues, please feel free to reach out to the author. EMAIL: [email protected]
The case studies illustrate how the absence of a properly drafted shareholders’ agreement can give rise to costly disputes, irreparably damaged stakeholder relationships, and, in extreme cases, lead to the winding up of the company.
Key provisions should include safeguards for minority shareholders, such as fair buy-out mechanisms and deadlock resolution clauses, which provide structured exit routes when relationships fall apart. The agreement should also clearly define the roles, responsibilities, and rights of shareholders and directors, ensuring that there is basis to address commercially unfair conduct where necessary.
Procedural clauses are as equally essential, covering areas such as the appointment and removal of directors, share transfer processes and restrictions, and dispute resolution mechanisms.
Conclusion
When properly drafted, a shareholders’ agreement serves as an essential governance instrument over and above the constitution that protects the interests of all parties and supports the long-term stability of the company.
We have compiled a checklist of key clauses that should be considered by founders for inclusion in any well-structured shareholders’ agreement.
If there are any queries on shareholder issues, please feel free to reach out to the author. EMAIL: [email protected]
Template Checklist of Clauses to Include in a Shareholders’ Agreement
# |
CLAUSE |
DESCRIPTION |
1 |
Particulars of Shareholders |
Full legal names and registered addresses and/or offices of all shareholders. |
2 |
Recitals |
Background information outlining the object and scope of the company and the shareholders’ agreement. |
3 |
Definitions & Interpretations |
Clarification of key terminologies used throughout the agreement to ensure consistency. |
4 |
Capitalisation |
Details of each shareholder’s capital contribution, including amount, form, and contact details. |
5 |
Management of the Company |
Number and composition of the board of directors and their responsibilities; the right of appointment and removal of directors; matters relating to the meeting of directors (i.e. frequency of board meetings; quorum requirements; notice of board meetings; and appointment of chairman). |
6 |
Shareholders’ Rights and Obligations |
|
7 |
Share Option Plan |
Terms and conditions under which individuals can be granted the right to purchase the company’s shares at a predetermined price within a specific timeframe. |
8 |
Reserved Matters |
Specific actions or decisions that require either unanimous consent, special majority, or specific shareholders’ or directors’ approval. |
9 |
Dividend Policy |
Guidelines on when and how the company will distribute its dividends to the shareholders. |
10 |
Deadlock Resolution |
Procedure to resolve disagreement among shareholders where they cannot agree or compromise on certain key decisions. |
11 |
Exit |
Mechanisms for shareholders to dispose of their shares in the company and leave the business under certain circumstances (e.g., Initial Public Offering, sale, buy-back) |
12 |
Pre-emption Rights |
Rights given to existing shareholders to purchase a proportionate number of newly issued shares before they are offered for sale to third-party buyers. |
13 |
Transfers of Shares |
Process by which shares may be transferred, including requirement for issuance of transfer notice and conditions for completion of the transfer, obligation to sign a Deed of Adherence to bind new shareholders to the shareholders’ agreement, and the associated costs. |
14 |
Restrictions on Transfer of Shares |
Limitations surrounding the sale and/or transfer of the company’s shares. |
15 |
Permitted Transfer of Shares |
Specific exceptions to the general restrictions on share transfers (e.g. to family members of affiliates). |
16 |
Right of First Refusal |
Rights given to shareholders to have the option to purchase shares that an existing shareholder intends to sell at the same price and on the same terms offered by third-party buyers, before those shares can be offered to said third-party buyers. |
17 |
Tag-Along Right |
Rights given to minority shareholders to participate in a sale of shares by the majority shareholders to third-party buyers on the same terms and conditions as the majority shareholders. |
18 |
Drag-Along Right |
Rights given to majority shareholders to force the minority shareholders to sell their shares on the same terms and conditions as the majority shareholders under special circumstances. |
19 |
Compulsory Transfers |
Specific circumstances that force the shareholders to sell their shares, regardlessnof whether they are willing to sell or not (e.g. death of shareholder, bankruptcy, insolvency, breach of shareholders’ agreement). |
20 |
Share Offer and Application |
Terms and procedure for offering and applying for new shares to be issued to existing shareholders or new investors. |
21 |
Valuation of Shares |
Method and process to determine the fair price value of a shareholder’s shares in certain situations (e.g. share transfers, shareholders’ disputes, buyouts, exits, death etc.) |
22 |
Restrictive Covenants |
Provision that limits shareholders’ actions to protect the company’s business interests during and after their involvement as a shareholder. |
23 |
Prevalence of Agreement |
Clarification that the shareholders’ agreement takes precedence if there is any conflict or inconsistency between the shareholders’ agreement and other related documents (e.g. the company’s constitution). |
24 |
Representations and Warranties |
Specific statements of fact and guarantees made by the shareholders with regards to their status, authority, ownership, or the condition of the business at the time of entering into the shareholders’ agreement. |
25 |
Confidentiality |
Restrictions on shareholders that prevent unauthorised disclosure of sensitive information of the company to third parties during and after shareholding. |
26 |
Announcements |
Restrictions on shareholders from making public announcements (e.g. press releases or media statements) without seeking prior approval from other shareholders. |
27 |
Termination |
Conditions under which the shareholders’ agreement can be terminated, and then effects of termination, including rights and obligations of the parties involved. |
28 |
Variation |
Requirement that any changes and/or modifications to the shareholders’ agreement must be in writing and signed by all parties (or a specific majority) to be effective. |
29 |
Assignment |
Conditions under which a shareholder can sell, gift, or otherwise assign their ownership shareholding, specifying whether consent from other shareholders of the company is required. |
30 |
No Partnership |
Clarification that the shareholders’ agreement does not create a partnership or a joint venture relationship amongst the shareholders. |
31 |
Indulgence, Waiver, etc |
Clarification that a shareholder’s failure or delay to exercise a right or remedy under the shareholders’ agreement does not constitute a waiver of that right or prevent them from enforcing it later. |
32 |
Costs and Expenses |
Allocation of responsibility for any legal and/or administrative costs incurred in connection with the shareholders’ agreement. |
33 |
Whole Agreement |
A statement that the shareholders’ agreement contains the complete and final understanding among shareholders to the shareholders’ agreement, superseding any prior agreements. |
34 |
Notices |
Specification on shareholders’ delivery of official communications to one another, including the method, timing, and recipient details. |
35 |
General Clauses |
Key legal boilerplate clauses such as Rights of Third Parties clause, Remedies clause, Severance clause, Counterparts clause, Governing Law clause, and Dispute Resolution Clause. |
