Professional Documents
Culture Documents
Differences
The Constitution will set out the broad provisions relating to the governance of the JVC, whilst the Shareholders
Agreement is a more specialized document tailored to the particular purposes of the Company, the nature of its
business and the wishes of its shareholders
o Can enter into a JVA even if there is no company forever, can draft a JVA as if it is a shareholders
agreement
o Can call each party a JV party, just dont call it a shareholder
o Nothing is stopping parties from coming together to operate a business/startup as if it is like a company
there is just no company incorporated
o When no company is incorporated under the laws of Singapore, then you call it a JVA (or consortium
agreement, partnership agreement)
o If commercially they intend for certain rules of CA to apply, it is for them to bring some of these
provisions in
o If you do not want CA to apply to unofficial entity, you would not bring in express terms in the CA into
the JVA
o Interchangeability issue does not matter whether the company has been incorporated or not
But can say that the agreement is subject to the successful incorporation of the company
Shareholders Agreement usually includes more prescriptive requirements relating to the operation of the
Company and controls what all shareholders would like to see in regard to the operation and management of
the Company
Shareholders Agreement bind the parties to the agreement, but does not necessarily bind future shareholders
o Governed by the ordinary rules of contract
o Incoming shareholder, whether it is by a sale, or transfer of shares, or issuance of new shares to a new
party, will only be bound by the terms, if he enters into a document which indicates that it will be similarly
bound
Deed of accession document that says that you will step into the shoes of the shareholders
that you are replacing as if you were an original party, assuming that this is a transfer situation
If it is a new issuance situation, you would have to subscribe to new shares
Constitution is regulated in all aspects by Singapore Companies Act will automatically bind all shareholders,
current or future
o Social, legal contract between shareholders and the public
o Constitution can be amended
Majority/Minority Shareholder Protection
o Without a Shareholders Agreement, minority shareholders may be exposed to the actions of the
majority who are able to amend the companys constitution provided that they hold the requisite voting
power of 75%
o Majority shareholders may wish to ensure that the entire share capital of the company can be sold if a
bona fide purchaser for value makes an offeror all the shares the Shareholders Agreement can
include Drag Along Rights, but a standard Constitution may not include such clauses
Major difference is that a shareholders agreement is governed by the ordinary rules of contract. However, the
constitution is regulated in part by the Companies Act.
o Under the Companies Act, a constitution can be amended from time to time by a special
resolution by shareholders holding 75% or more of the voting rights.
o On the other hand, a shareholders agreement can generally only be varied with the consent of
all the parties.
o Thus, it may be preferable for shareholders (particularly those with minority shareholdings) to enter a
shareholders agreement in order to entrench certain rights, e.g. pre-emptive rights in respect of the
transfer or issue of shares.
o In the absence of a shareholders agreement, minority shareholders may be exposed to the actions of
the majority who may amend the rights of all shareholders, providing they hold 75 percent or more of
voting rights (notwithstanding that any such action may be oppressive against the minority).
o A shareholders agreement may often be preferred for particular shareholders rights as shareholders
consider it to be a more private document than the companys constitution.
A shareholders agreement is confidential between the relevant shareholders and the company whereas a
companys constitution maybe publicly available.
A shareholders agreement is typically more cost-effective and easier to enter into as it follows standard contract
law and doesnt require a special resolution to be effective and enforceable.
The shareholders of a particular class may wish to enter into a private arrangement as between themselves. It
could, therefore, be a question of practicality.
A shareholders agreement can: 1) confer a specific power to appoint a director or directors, and remove those
directors, on a particular shareholder or shareholders holding more than a specified percentage of shares; 2)
alter the usual voting power of directors, for example, by adopting voting entitlements which reflect the
proportional shareholding of the shareholder who appointed them; 3) prescribe arrangements for meetings,
including who must be present for a quorum and how often they must be held; 4) include a list of decisions
which the directors must take to shareholders, such as decisions to sell key assets or businesses, acquire
businesses, acquire assets of a specific type (e.g. land), borrow money or make certain personnel decisions
(e.g. appointing or removing a CEO): this is in addition to those decisions which the Act says directors must
take to the shareholders (changing the company name, constitution, certain share buy-backs etc.)
o A shareholders agreement can thus give shareholders more certainty regarding when, and the nature
of, decisions which directors must refer to them.
The constitution would have provisions regarding the issue and transfer of shares, and the process by which
these transactions can take place. The starting point is that the power to issue shares or approve transfers rests
with the directors, but they may also be required to offer shares to existing shareholders in proportions (known
as pre-emptive rights).
o A shareholders agreement would more specifically regulate these transactions, by
Valuation agreeing on the method of valuing shares
Succession plans providing for the transfer of shares at particular times, e.g. in order to give
effect to succession plans
Call options agreeing on which events may give rise to other shareholders having a right to
purchase the defaulting partys shares
Put options agreeing on which events may give rise to shareholders having an obligation to
buy other shareholders shares
Drag along prescribing when majority shareholders can require minority shareholders to join
in a share sale to a third party
Tag along prescribing when minority shareholders can require majority shareholders to
involve them in a share sale to a third party
III. Under what circumstances could a deadlock arise in the context of the
proposed joint venture? What are some contractual mechanisms to resolve
such deadlocks?
Options available
Remedies at law in the event of an unresolved dispute between shareholders resulting in deadlock
o Shareholders can, by special resolution (75%), vote to wind up the company. If there is an unresolved
dispute resulting in deadlock, a shareholder can also apply to the court to wind up the company. If it is
of the opinion that it is just and equitable to do so, the court can order a winding-up of the company, or
for the interests of one or more shareholders to be purchased by the company or any of the other
shareholders.
Additional vote
o Chairman can have casting vote in deadlock situation appointment of chairman may rotate.
But who gets to be chairman?
o Alternates constitution should clarify whether the director can appoint an alternate to attend and vote
in his place.
Independent directors swing vote
o Appointment of such directors have no specific allegiance to either party
o Outsiders swing vote At shareholder level, the company may issue a golden share to the outsider or
at board level ask an impartial non-executive director to make the decision. Whether the outsider is a
director or a shareholder, there are a number of considerations which must be taken into account if this
method is used, including identifying a suitable impartial person with appropriate business expertise,
the costs of referral to an outsider (i.e. what payment will the outsider require), and whether deadlock
resolution may be delayed by the time taken for the outsider to understand the issues
If you can find a candidate willing to act and acceptable to both shareholders
Does the third director resign after the deadlock is broken?
2-tier board structure there can be a supervisory board and a management board
o Supervisory board represents owners and employees
o Management board comprises of key executives
o Contrast from a 2-company structure holding and subsidiary company
o Problem with these two is the need to clarify which matter falls under whose jurisdiction
Internal escalation
o If the company is within a group and deadlocked it may be sensible for the deadlocks to be escalated
to higher levels of management within the group. Such a procedure may be effective because it will
concentrate the minds of the management team (as they will be unwilling to have to refer the matter
higher up), and managers at higher levels may be better able to appreciate the broader strategic picture.
However, this procedure is not likely to be effective where the parties have few or no levels of
management above those directly involved.
Dispute review panel
Reference to mediation, arbitration or expert determination
o Referring a dispute to an external expert or arbitrator could unlock deadlocks at either board or
shareholder level. However, such referrals may involve considerable time and expense and may not be
appropriate where the deadlock arises for a business rather than an operational reason. Mediation may
be used to assist the parties to resolve the deadlock themselves but will not provide a final resolution if
the parties are unable to agree on a solution to the deadlock. If the parties are unable to agree on the
resolution of a deadlock and none of the above methods are effective, options will usually be limited to
a transfer of shares or voluntary liquidation of the company.
A good solution if the parties approach it in good faith and intending to compromise, as a
mediator has no power to impose a solution on the parties
Transfer of shares
o Russian roulette provision
A typical Russian roulette provision works by one party (A) offering to buy the other party's (B's)
interest in the joint venture at a price specified by A. B has a limited period of time to sell its
interest at that price or, if it does not want to sell its interest, to purchase A's interest at the
same price. If B does not respond within the specified time, B may be deemed to have accepted
A's offer to buy its shares. Such provisions are designed to ensure that the price paid for the
transfer of shares is fair and that the parties only resort to the use of the procedure if they are
unable to continue to work together.
However, the arrangements are likely to favour the party that is financially stronger,
who can afford to buy out the other shareholder or more involved in the business.
o Mexican or Texas shoot-out
This usually involves one party (A) offering to buy the other party's (B's) shares at a price
specified by A. B is then entitled either to accept A's offer or to reject A's offer and state that it
wishes to buy A's shares at a price higher than that specified by A. A and B then make sealed
bids or enter into an auction, and the person who bids the highest is entitled to buy the other
out. This procedure is subject to the same objections as Russian roulette procedures but is
also more open to exploitation, as a party who does not really want to buy the other party out
could force the other party into paying a higher price than it initially offered. If neither party is in
a position to buy out the other party, the parties may attempt to sell the whole company to a
third party, failing which the company may enter into voluntary liquidation. However, in a multi-
party agreement, it may be possible for one of the shareholders to transfer its shares and exit
without affecting the ongoing operation between the other parties.
o Fairest (highest) sealed bid under which both shareholders must make a sealed offer to buy the shares
of the other shareholder, which offers are given to a third party who decides which offer price is the
fairest and must be accepted the loser selling to the winner
A solution that also favours the financially stronger shareholder
Statutorily, under s 254(1)(i) of the Companies Act, parties may be able to apply for a just and equitable winding-
up where there is a deadlock without contractual mechanisms to unstuck the parties
o Factors that objectively show when it is just and equitable to wind up include:
Irretrievable breakdown this is usually the reason to resolve procedural deadlocks
Loss of substratum where the JVC can no longer achieve its objectives
Voluntary liquidation
o Voluntary liquidation of the company will usually be a last resort where none of the parties are in a
position to buy the others out and the parties are unable to effect a trade sale of the company to a third
party. Voluntary liquidation involves the company being wound up and selling its assets and/or
distributing them. If the company sells some or all of its assets, the shareholders may be entitled to
make bids to the liquidator for assets that they want. Alternatively, the shareholders may prefer to agree
in advance how the company's assets are to be redistributed to them if there is a surplus on liquidation.
If the company is UK registered, one or more of the parties may alternatively apply to the court for the
company to be wound up on just and equitable grounds. However, there is no certainty that the court
would determine that the grounds for such a petition had been satisfied.
o Usually with either shareholder being at liberty to bid for the assets
Transpose some of the public companys obligations, which includes having an independent director on the
board
o Independence itself must not be valid
o Submit matter to a third-party independent expert, subject to the proviso that what is being mediated is
a non-commercial issue
o If the matter is something that is commercial, it is okay for them to go down to the last stop in the road
o Other provisions will apply, e.g. transfer provisions, first right of refusal
o Strictly not a legal matter
Go to an accredited mediator does not adjudicate, parties come to an agreed solution with the help of a
mediator
o Whatever is the outcome of the mediation will be put in writing
Divorce proceedings
o Parties want to show that they are engaging in the resolution for the deadlock, but how willing are they
to agree to what the mediator says?
o When it comes to a bad situation, when either of them wants to go by force, how does the company
move on after the decision has been made?
IV. How a right of first offer and a right of first refusal would work to
restrict your clients ability to transfer its shares in the JVC; Key
differences between right of first offer and right of first refusal
Right of first refusal Holder of the right has the power to review all other offers of the party selling, and can
buy the business simply by matching the highest offer. This can allow the party remaining in the JVC to prevent
a newcomer they do not know from buying a stake in the JVC. (Soft pre-emption right)
o Considered to favour the other shareholders (not the selling shareholder)
o If there are two shareholders A and B and a right of first refusal in favour of B, then A is first required to
offer his share to third parties and obtain a price from them for this. A is then required to approach B
with the price offered by third parties. If B can match or better the price offered by third parties, A must
sell his share to B.
Right of first offer Holder of the right has the power to make the first offer to the party selling, and the party
selling can accept/reject such offer from the party remaining in the JVC. If rejected, the party selling can go find
a new 3rd party (Hard pre-emption right)
o Such a provision requires a shareholder who wishes to sell its shares to offer them to the other
shareholders through a pre-emption process but is not required to identify a third party purchaser. There
is an exclusivity period during which the selling shareholder can only negotiate with the other
shareholders before commencing third party negotiations. If an agreement to purchase such shares is
not reached, the selling shareholder can sell the shares to a third party at a price which is greater than
that offered by the other shareholders.
o If a shareholder decides to sell its share in the company, the selling shareholder must first offer its
shares to the other shareholder to whom the right of first offer is granted, who in turn may offer a price
for the shares to the selling shareholder. If satisfied by the price offered by the other shareholder or if
the selling shareholder is unable to obtain a higher price from a third party, then the selling shareholder
only has the option to sell its shares to the shareholder who has the right of first offer. However, if the
selling shareholder receives a price higher than that offered by the other shareholder from a third party,
the selling shareholder would be free to sell shares to the third party at the higher price.
o If there are two shareholders A and B, with a ROFO in favour of B granted by A and A decides to sell
his shares, then A must first offer his shares to B. Only if B refuses to purchase As shares, or if A can
obtain a higher price for his shares from a third party than that offered by B, can A sell his share to a
third party.
o Considered to favour the selling shareholder
Would you put the pre-emption rights in the constitution?
Whenever there is an issuance of new rights, you should have the shareholders signing a waiver of these rights
Right of first offer can prevent dilution of ownership
o This clause confers a right to existing shareholders to subscribe for a new issue of shares before
outsiders can do so.
o Dilution of ownership can occurs at any new share issue. If a company has 100 shares and issues a
further 20, then a shareholder who held 40% of the shares previously would find that he held only 33%
of them after the issue. The new issue has the effect of reducing how much say he has in the running
of the expanded company.
o Right of first offer allows him to buy some of the new shares (usually up to the proportion he held before)
in preference to anyone else so that he can maintain his relative power compared to other shareholders.
Importance of right of first refusal clause
o A majority shareholder might be able to control shareholder decisions; but he might not be able to
prevent the board of directors authorising the issue of new capital and reducing his voting power as a
shareholder on matters important to him.
o A minority shareholder might be powerless to control whether a share issue happens. The effect might
be to further reduce his relative holding below the limits at which the law gives him automatic rights to
do certain things. He may find himself edged out of the company without being able to prevent it.
o In either case, the inclusion of a right of first refusal would allow the shareholder to maintain his power
o Usually, a limit is put on the number of new shares that can be bought so that a shareholder can
maintain his ownership percentage, but not strengthen his position unless another shareholder decides
not to (or cannot) exercise his right.
o The company could make it easier for shareholders to take up their right by allowing them to buy the
shares at a discount to the price external buyers would pay.
Share certificate gives title, but you need it to be registered on the Register of Shares