Common Issues Which Cause Shareholder Disputes

Companies are one of the most common business structures in Singapore. Generally most entrepreneurs understand that to become part of a company, one has to obtain shares which then gives them certain rights. However, what is not commonly understood is that shareholders rights are generally limited to the following:

• The right to vote at shareholder’s meetings, with voting power in the same proportion as the shares held
•  The right to receive dividends, IF the company makes a profit AND the company decides to declare dividends – and the dividends are also proportionate to the shares held

When one looks at reported court judgments of shareholder disputes, in general shareholders tend to fight over the degree to which their actual or perceived rights should extend beyond these default rights.

The Right To Manage The Company’s Direction Or Operations

If an entrepreneur or investor wants a major say or the right to actively participate in running the company or conducting the company’s business, by default being a shareholder is not enough. However, not all shareholders like the risk of personal liability that comes with being a director (such as failure to ensure that the company pays CPF contributions to its employees). The expectation of being consulted or requiring consensus usually doesn’t work out without some form of written agreement – while it is possible to prove an agreement by showing a course of conduct, many shareholders who resort to litigation tend to fall short of that mark.

The right to manage can come in many different forms – having voting power in excess of shares held, requiring consent for particular matters (such as diversifying the company’s business) or even giving the shareholder a veto right. Again, without some sort of written agreement, such unfulfilled expectations tend to lead to hotly contested legal proceedings.

The Right To Be Bought Out 

When minority shareholders have unfulfilled expectations, they tend to want to exit. However, the law does not provide for a right to force the majority to buy out minority shareholders, unless the minority can cross the threshold of oppression. Without going too much into technical details, it is basically giving the court a history lesson into the parties’ relationships and why the minority should not be expected to continue sailing on the same ship as the majority. Due to the highly personal and informal nature of most shareholder relationships, this tends to be a protracted exercise.

But wait! Even if a minority shareholder could get a court order for buyout, that’s not the end of the story. There are also many cases of further litigation on the next issue:

The Value Of Shares To Be Bought Out

While most accountants are able to value a company based on its net assets, some industries and business models require alternative and more complex valuation methods to account for the unusual nature of the company’s business. Naturally, not everyone agrees on the appropriate method, and they end up devoting more resources to persuade the court to adopt their preferred valuation model.

In addition, minority shareholders who feel that they do not have adequate insight into the company’s financial records tend to also kick up a fuss on the assumptions supporting documents being fed into a valuation model to generate the buyout price. Together, these two factors can cause the cost of shareholder litigation to effectively double after the court grants a buyout in principle.

How To Avoid Shareholder Disputes From Spiralling Out Of Control

In our experience, many of these issues can be pre-empted or de-escalated in the following ways:

1. Sign a shareholders agreement before starting the venture, to make everyone’s expectations, responsibilities, rights and obligations clear and transparent.
2. Build in amicable dispute resolution mechanisms such as negotiation periods or mediation as the primary method of dispute resolution.
3. Create possibilities for shareholders to exit at fair value, without having to establish fault or to incur cost of expert valuation.

This is a collaboration article with VanillaLaw LLC.

For more information or legal assistance, you may contact Boon Gan of VanillaLaw LLC at [email protected] or via WhatsApp at (+65) 8620 8629.