The exclusion of shareholders from the company as quickly as possible may be necessary for various reasons, for example:
• Disputes between majority and minority shareholders;
• Disputes between directors and shareholders;
• A specific shareholder whose actions are often destructive.
Such disputes with shareholders may affect business operations, such as the inability to obtain enough votes to make decisions at shareholders' meetings due to conflicting points of view. Therefore, the company may resort to the exclusion of the shareholder.
There are several ways to exclude a shareholder from a Singapore company, and this article will cover 2 of these procedures:
1. By following the exclusion mechanism(s) provided in the shareholder agreement.
2. Negotiating the purchase of shares from a shareholder.
Both options are quick procedures for expelling a shareholder. It is because the shareholder agreement is binding on all shareholders, and negotiations reduce the likelihood of becoming involved in costly and time-consuming lawsuits.
A shareholder agreement is a contract between all shareholders that sets out the rights and obligations of each shareholder and what they can and cannot do in the company. This also applies to the procedure for the exclusion of shareholders.
Referring to a shareholder agreement should be the first step when expelling a shareholder from a company. It is because the agreement may already contain a set of mechanisms for such a case.
When a shareholder wishes to withdraw from the company's shareholders, he voluntarily transfers his shares to another person. However, this transfer must be carried out under the terms of the shareholder agreement.
For example, the agreement may contain restrictions such as pre-emption rights and the right of first refusal, where a shareholder must first offer the shares to all existing shareholders before being able to sell the shares to third parties. It helps prevent a shareholder from selling or transferring the shares to another party with whom the remaining shareholders may not want to do business.
What happens if a shareholder does not agree to withdraw from the company's shareholders?
The shareholder agreement usually provides for various cases where the transfer of shares is mandatory, even without the shareholder's consent. Examples of such situations include the following:
• A material breach of a shareholder agreement provision that is not remedied within the specified days.
• A shareholder that is a legal entity that is in liquidation, litigation, or otherwise deemed insolvent.
• A shareholder who is an individual has died.
• Shareholders are in a no-win situation where fundamental disagreements make it impossible to make progress.
In such cases, a mechanism may be applied. The shareholder will be forced to transfer his shares to the company or other shareholders according to the price and valuation method specified in the shareholder agreement.
A shareholder's refusal to transfer shares may be considered a breach of the shareholders' agreement, which is subject to settlement following its dispute resolution clause, for example, through mediation or arbitration.
Without a shareholder agreement, it is worth negotiating to find a compromise rather than relying strictly on your legal rights.
One example of a compromise is negotiating with a shareholder to either sell all of their shares or, if they disagree, buy out their shares at a fair price.
However, negotiation success may be low when communication between the disputing parties is broken. Finding a trusted third party, such as a mediator or lawyer, helps facilitate the negotiation process.
• Prepare a share transfer agreement;
• Determine if there are any restrictions on the transfer of shares, such as the preemptive right to purchase;
• Sign the act of transfer;
• Get approval from the board of directors for the transfer of shares;
• Pay stamp duty to IRAS;
• Cancel the original share certificate held by the relevant shareholder;
• File a share transfer notice with ACRA;
• Issue a new share certificate to the shareholders who bought the shares.
• Cost of buying shares;
• Stamp duty, which consists of 0.2% of the purchase price of the share price;
• Late payment fee for stamping (if any) of up to $25 or four times the standard stamp duty payable, whichever is higher.
When attempting to expel a minority shareholder from a company, it is important to prevent repressive behaviour from the majority shareholders. A minority shareholder is a shareholder who owns less than 50% of the voting shares of a company.
Some examples of punitive behaviour that should be avoided when trying to expel minority shareholders from a company include:
• Limited payment of dividends;
• Decrease in equity participation of minority shares;
• Exclusion from participation in the management of the company.
Minority shareholders are protected from unfair disadvantage by dominant majority shareholders who treat them commercially unfairly. In such cases, they may apply for relief from retaliation under section 216 of the Companies Act.
In the event of such an appeal, the Singapore Court may then grant any remedy it deems appropriate to conclude the case if a just complaint is made.
The Companies Act does not require a director also to be a shareholder. Therefore, unless the constitution of a company otherwise requires, the exclusion of a shareholder who is also a director is permitted. The relevant person will continue to perform his/her duties only as a director.
Suppose it is necessary that this person also be removed from the position of director of the company. In that case, the removal must be carried out under the company's articles of association.
Therefore, the simplest and easiest way to exclude a shareholder is to refer to the exclusion mechanism(s) provided for in the shareholder agreement, if any. If your company does not have a shareholder agreement, or if the shareholder agreement does not provide for such a mechanism(s), the alternative is to find a working compromise, such as one party buying out the shares of the other.
However, as mentioned above, the success of negotiations is not guaranteed. Therefore, it is optimal to have a shareholder agreement.
Suppose you need assistance drawing up a shareholder agreement or advice on expelling a shareholder due to the lack of a shareholder agreement. In that case, you can contact our company's specialists using any communication channels listed on the website. We are waiting for your requests!
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