Ensuring Your Company’s Constitution Aligns with Your Shareholders’ Agreement in Singapore

What is a Shareholders’ Agreement And Company Constitution?

A shareholders’ agreement is a critical document in defining the rights, obligations, and expectations of a company's shareholders. 

While a shareholders’ agreement is a private contract between shareholders, the company’s constitution is a legally binding document that governs the company’s internal management. 

If the two are not aligned, conflicts can arise, and enforcement of key shareholder protections may become problematic. It can result in serious legal, operational and financial risks.

Implications of a Disconnect Between the Shareholders’ Agreement and Company Constitution

A misalignment between these documents can lead to:

• Enforceability Issues: Courts in Singapore may prioritise the company’s constitution over a shareholders’ agreement in certain disputes.
• Third-Party Confusion: External parties (banks, regulators, investors) rely on the constitution, not private agreements, to assess corporate governance.
• Investor & Exit Risks: Potential investors may be deterred by inconsistencies, and transfer of shares in Singapore may be challenged.
• Operational Disruptions: Company officers and directors may face conflicting instructions on governance matters.

Common Areas of Non-Alignment

Misalignment often occurs in the following key areas:

• Voting Rights & Decision-Making: Shareholders’ agreement may grant specific voting rights that are not reflected in the company constitution.
• Transfer of Shares: Pre-emption rights, rights of first refusal, and drag-along/tag-along clauses often differ between the two documents.
• Board Composition & Appointment: The shareholders’ Agreement may specify board seats for certain investors, but if this isn’t reflected in the company constitution, disputes may arise.
• Dividend Distribution: The agreement may define profit-sharing mechanisms that contradict the constitution’s provisions.
• Exit & Buyout Provisions: Shareholder exit mechanisms (e.g., forced sales, valuation methods) must be reflected in the constitution to be enforceable.
• Dispute Resolution: The agreement may specify arbitration or mediation, while the constitution may not recognize these mechanisms.

Limitations on Constitutional Changes Under Singapore Law

While companies in Singapore have flexibility to amend their company constitution, there are legal constraints:

• Approval Thresholds: Amendments generally require at least a 75% shareholder vote (Special Resolution) under the Companies Act (Cap. 50).
• Statutory Provisions Override: Certain statutory requirements (e.g., director duties, creditor protections) cannot be overridden, even if agreed upon by shareholders.
• Protection of Minority Shareholders: Any amendment that unfairly prejudices minority shareholders could be challenged under the Companies Act.
• Regulatory Considerations: Certain regulated industries (e.g., finance, healthcare) may have restrictions on governance structures that must be reflected in the company constitution in Singapore.

Case Studies: When Misalignment Leads to Disputes

Case Study 1: The Boardroom Deadlock

A tech startup secured venture capital (VC) investment, granting the VC firm two board seats under the shareholders’ agreement in Singapore. However, the company’s constitution did not reflect this, leading to disputes when the founders refused to recognize the VC’s nominated directors. The VC firm had to take legal action, delaying Business operations for months.

Lesson: Ensure board appointment rights in the Shareholders’ Agreement are reflected in the Company Constitution in Singapore.

Case Study 2: The Forced Exit Dispute

A co-founder in a fintech company wanted to exit, and the shareholders’ agreement required remaining shareholders to buy out his shares at fair market value. However, the company constitution had no provision for compulsory buyouts. When the other founders refused to purchase his shares, the departing founder was stuck in the company, leading to a long-drawn legal battle.

Lesson: Shareholder exit mechanisms should be embedded in the Company Constitution in Singapore.

Case Study 3: The Investor Lockout

An e-commerce startup agreed to give early investors priority dividend rights through a shareholders’ agreement. However, the company constitution still contained standard equal-shareholder rights, contradicting the agreement. When the startup became profitable, the founders distributed dividends equally, ignoring investor priority. This led to investor litigation, damaging the startup’s fundraising prospects.

Lesson: Financial rights and obligations in shareholders’ agreement must be properly mirrored in the company constitution.

Best Practices to Ensure Alignment

To avoid issues, Companies should:

1. Draft Together: Prepare the shareholders’ agreement and company constitution concurrently to ensure consistency.
2. Use Cross-Referencing: Where feasible, include references in the company constitution to key provisions in the shareholders’ agreement.
3. Regularly Review: As the business evolves, revisit both documents to ensure they remain aligned.
4. Seek Legal Advice: Engage a Corporate Lawyer in Singapore familiar with Singapore’s regulatory framework to draft and review these documents.

Final Thoughts

Aligning the shareholders’ agreement with the company constitution is not just a legal formality—it’s a business necessity. Misalignment can lead to disputes, hinder investment, and create governance inefficiencies. Companies should proactively review both documents and ensure they work in harmony to support a stable and legally sound corporate structure.

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