Three reasons why you need a shareholders agreement for your business

It’s not a legal requirement, so why do lawyers insist you need a solid Shareholders’ Agreement?

Delphine Tse, Senior Associate at ELLALAN, gets straight to the point in this episode of our Let’s Chat Legal series of video podcasts.

“In this video, I am going to share with you the 3 main reasons to have a shareholder agreement as soon as you have more than one shareholder and even before your business commences operation.

This is the case even where the company has already had in place the Articles of Association – which is the document that outlines the constitution and governance of the company such as how a valid shareholders’ meeting should be convened.

The most compelling reason to have a Shareholder Agreement is that the articles of association are simply not good enough.

More often than not, founders adopt the model articles that are easily available, which in fact, may not be adequate in addressing a couple of issues that tend to attract problems down the road such as – not having provisions that restrict transfers of shares or not having provisions that address the issue of deadlock, in particular, where there is a 50/50 shareholding in the company.

A Shareholder Agreement would therefore be a more appropriate document to separately deal with these kinds of issues – and to provide mechanisms to resolve such disputes.

The second reason for having a Shareholder Agreement is confidentiality. This is because, the Shareholder Agreement is a private document and does not have to be filed with the company registry as opposed to the Articles and Associations, which can be viewed by anyone.

Finally – confidentiality and non-compete obligations must be imposed on the shareholders, especially on the investors. It is not uncommon for investors to have stakes in a couple of companies within the same industries.

To prevent these investors from sharing confidential information with your competitors, confidentiality and non-compete clauses are vital!

We regularly handle disputes where companies complain that certain shareholders/directors are diverting businesses or sharing confidential information for their own benefits, and these companies regret not having a Shareholder Agreement in place.

So, take home message – make sure you have a properly drafted shareholder agreement in place if there are more than one shareholders in your company.

If you have any questions about this topic, please do not hesitate to contact us. For more information about us, pls visit our firm’s website or follow us on Linkedln.

Thank you for watching and see you again in our next video.”


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