Understanding Shareholder Agreements vs. Company Constitution for Singapore Companies

Establishing a clear and robust governance framework is essential for any company in Singapore to achieve stability and long-term success. Two regulatory documents that form the cornerstone of this framework are the Company Constitution and Shareholders Agreement.

While both are vital, they have some distinct differences, purposes, and legal weights. Namely, a well-drafted Shareholders Agreement must complement the Constitution to provide comprehensive, tailored protection for all stakeholders.

Understanding the differences between the Company Constitution and Shareholders Agreement, and what to keep in mind when drafting both documents, is key to protecting your investment, pleasing your shareholders, and preempting costly internal disputes.

What is the Company Constitution?

Prior to 3 January 2016, companies incorporated in Singapore had to have two documents: the Memorandum of Association and its Articles of Association (collectively referred to as the M&AA). Following the enactment of the Companies (Amendment) Act 2014, the M&AA was consolidated into a single document called the Company Constitution. Every company incorporated in Singapore is required to have a Constitution upon incorporation.

The Company Constitution is a single, mandatory public document filed with the Accounting and Corporate Regulatory Authority (ACRA). Its primary role is to establish the company’s legal identity and provide the structural rules for corporate governance by setting out core statutory rules that govern the relationship between the company and its members (shareholder rights), as well as between the members themselves.

Key contents of Company Constitutions:

• The company’s name and liability clause
• Rules on share issuance and transfer
• Procedures for conducting board and shareholder meetings
• Procedures for appointment and removal of directors

Because the constitution is filed publicly with ACRA, it is accessible to anyone who conducts a search on the company. This is a critical point that limits its utility for sensitive commercial negotiations.

ACRA does provide a model Constitution as a useful resource for new companies. However, while convenient, this generic template is a one-size-fits-all solution that may fail to address the unique commercial complexities or specific shareholders’ rights requirements of businesses with multiple founders or external investors.

What is a Shareholders Agreement?

While the Company Constitution is a publicly accessible document, the Shareholders Agreement is a private, voluntary contract entered into by and among some or all of the shareholders of a company, and often the company itself. Unlike the public Constitution, the shareholders agreement is a confidential document. This allows the parties to include detailed, commercially sensitive terms without public disclosure.

The Shareholders Agreement fills the substantive gaps left by the statutory Constitution and is the primary document used for addressing crucial operational and strategic matters related to shareholders’ rights in a tailored, specific way. This commonly includes:

• Minority Shareholder Protection: Provisions to prevent minority shareholder oppression, such as granting minority shareholders veto rights over major decisions like selling core assets, changing the company’s business scope, or incurring significant debt.
• Share Transfer Restrictions: Clauses specifying strict share transfer restrictions, such as rights of first refusal for existing shareholders, or drag-along and tag-along rights, which regulate exit processes.
• Dispute Resolution Mechanisms: Establishment of clear dispute resolution mechanisms, often mandating mediation or binding international arbitration before resorting to litigation. This protects the business from costly and time-consuming court battles.
• Shareholder Deadlock Resolution: Outlining clear procedures, such as buy-sell clauses (e.g. Texas Shoot-out), to resolve a shareholder deadlock where parties cannot agree on critical company decisions.
• Exit Strategies: Clear exit strategies for shareholders including procedures for share buybacks and agreed-upon valuation mechanisms.

Key Differences: Shareholder Agreement vs. Company Constitution

Still having trouble differentiating between Company Constitution and Shareholder Agreement? Refer to our simple table below or consult our corporate law firm. Our lawyers can provide expert legal advice in corporate governance matters, assisting your business with its unique strategic and operational concerns.

Common Pitfalls to Avoid When Drafting Key Company Documents

Even when intending to protect shareholder rights, poorly drafted documents—be it the Company Constitution or Shareholder Agreement—can lead to future complications. Common mistakes made during the drafting process include:

• Failing to properly align the two documents: Conflicting clauses or stipulations can make dispute resolution unnecessarily difficult and expensive.
• Using a generic template without customisation: Generic clauses often fail to address the specific risks unique to your business sector or founder relationship.
• Failure to address key future scenarios: Agreements must anticipate potential challenges, such as a major investor injecting capital, or a founder’s departure. Documents that fail to address these may set you up for costly legal battles down the road.
• Ambiguous language: Vague wording regarding decision thresholds or valuation methods is a common source of shareholder deadlock and subsequent litigation.
• Not specifying clear dispute resolution mechanisms: Leaving the parties with no recourse other than immediate litigation is a costly omission.

How Engaging a Corporate Law Firm Can Help Protect Your Business Interests

The combination of a legally sound Company Constitution and a comprehensive Shareholders Agreement provides the strongest foundation for corporate governance, minimising the risk of costly litigation.

Given the legal interplay and critical nature of both the Company Constitution and the Shareholders Agreement, engaging a specialised corporate law firm is vital to drafting robust and comprehensive documents.

At our law firm in Singapore, we possess the necessary specialised expertise in corporate governance to help you ensure these documents are effectively drafted to protect you and your stakeholders’ rights and concerns.

Farallon Law’s corporate lawyers can help you move beyond the superficial nature of the model ACRA constitution to draft bespoke documents that truly reflect the commercial reality of your business. We ensure your documents comply with the Companies Act and, crucially, that the Shareholders Agreement does not conflict with the Company Constitution.

We can also advise on how best to amend your Company Constitution and provide strategic advice on protecting shareholder rights and planning for future scenarios, including mechanisms to deal with share transfer restrictions and shareholder deadlock. If your business is undergoing M&A, we can provide advice on legal due diligence for M&A transactions as well.

Contact Farallon Law today to secure your business’ future and corporate governance needs.