Singapore is often seen as a key player in entrepreneurship, being a financial hub that provides a great environment for startups to bloom and grow. As such, many expatriates choose to set up their business here, in hopes of it succeeding and making a fortune. Yet oftentimes, in many small businesses, shareholders tend to get into agreements. Especially for expat entrepreneurs who are not always based in Singapore, one of their only sources of protection is the shareholder agreement, setting up key principles that all shareholders
What are shareholder agreements?
Shareholder agreements are contracts setting out how the company is to be managed to maximise the smooth operation of the business. There are no limits to shareholder agreements, but they generally cover a multitude of issues including:
By and large, a shareholder agreement can be used to supplement the company constitution, as it provides more prescriptive provisions that are able to adequately address the specific business requirements of the company, as well as the concerns of the shareholders.
Why do they benefit shareholders?
Many companies prepare a shareholder agreement before the incorporation of their company, for 3 main reasons:
How are expat entrepreneurs outside of Singapore benefitted?
For expat entrepreneurs living abroad, they generally have less influence within the board. As they are often the minority figure within the board, they will need safeguards to ensure that they have control within the board. Shareholder agreements offer 2 potential rights for these expat entrepreneurs.
Rights of first refusal
A right of first refusal is defined as a contract among shareholders, where if any shareholder decides to sell their shares, they will be obliged to offer them to existing shareholders before opening the shares up to the open market. With this contract, expat entrepreneurs are able to guarantee that unwanted new entrants will be blocked from entering the board within the business. This prevents unwanted proximity, and allows for the expat entrepreneur to fulfill his vision within the company, even when he resides abroad. Furthermore, this contract helps maintain control of the company, by ensuring that shares stay with the expat entrepreneur. This prevents a situation where the shares are diluted, and the expat entrepreneur holds less say within the company as he has a lower percentage of shares.
Tag-along rights
Tag-along rights protect these expat entrepreneurs by allowing them to participate on the same terms as other shareholders if a sale is initiated. This protects the expat entrepreneurs, as it gives them better exit opportunities, where they are given the chance to sell shares at a potentially favorable price alongside majority shareholders. Through this, expat entrepreneurs would not be locked into a foreign venture, as they have more opportunities to liquidate their shares, exiting the company with the money that they have earned.
In other cases where the expat entrepreneur is the majority figure within the firm, protections are also granted through shareholder agreements to ensure that they are able to realise their vision, even when they are not situated within Singapore.
Drag-along rights
Conversely to tag-along rights, drag-along rights obliges minority owners to sell their shares, facilitating full company buyouts. This ensures the majority shareholder can deliver 100% of share capital to buyers, allowing for expat entrepreneurs to have greater flexibility when negotiating deals with buyers, where a small local stake would not be able to block a full company sale. Ultimately, this benefits the expat entrepreneur in fulfilling his vision for the company.
How are expat entrepreneurs within Singapore benefitted?
Job security
For many expat entrepreneurs, who rely on their business for their Entrepass – which allows them to stay in Singapore, safeguards are crucial in ensuring their rights in black and white. Shareholder agreements can include provisions (subject to the Companies Act and the company’s constitution) to safeguard roles; for example, reserved matters, quorum/veto mechanics, or enhanced voting thresholds, but they cannot override statutory rights of shareholders to remove directors where the Act permits it.
Clarity in exiting
For many expat entrepreneurs, they do not plan to stay in Singapore in the long-term, and would prefer to return to their home country in the future, thus having the wish to eventually exit the business. A shareholder agreement is crucial in pre-defining exit routes, such as providing expat entrepreneurs with tag-along rights, or a put option. A put option is a right for the expat entrepreneur to sell their shares to the company or other shareholders at a predetermined price or formula, ensuring that they will be able to exit the company when they want to.
Conclusion
To conclude, starting a business as an expat entrepreneur is not easy, with many long-term legal complexities that need to be addressed from the start. With a shareholder agreement, shareholders will be able to guarantee safeguards for their rights, ensuring that their journey with the company will be smooth. Navigating shareholder agreements is complex, and misinterpretations can lead to further problems in the long-run. Do reach out to us at Legal Expat SG if you require professional advice
Disclaimer: This article provides general information and does not constitute legal advice. Please seek professional advice for your specific situation.
Do reach out to us at Legal Expat if you require professional advice. We have a team of qualified lawyers that can assist you. Email us at: info@legalexpat.sg or drop us a WhatsApp at: +65 8093 4393 if you require assistance.