In a public company, an unhappy shareholder can sell his shares on the stock exchange and exit the company. However, it is not so easy for a shareholder to dispose of his shares in a private company. This is especially when the company’s constitution restricts the right of shareholders to transfer their shares. The exit rights of the shareholder can be protected by adding certain clauses in the shareholder’s agreement. Some of the important clauses that highlight shareholder’s exit rights are the following:
The right to tag along is a contractual obligation usually to protect the minority shareholder. In the event the majority shareholder sells his stake in the Company, then the tag-along right holder has the right to join the transaction and sell his stake in the Company. Tag-along right operates to oblige the selling shareholder to include the holdings of the tag-along right holder in the negotiations for the sale of shareholding.
The “tag-along clause” allows minority shareholders to piggyback on the majority shareholder’s ability to find a buyer at an attractive price. Minority shareholders, especially when they are involved in running the business, generally lack the resources to find such buyers. It is also beneficial to the majority shareholders because it gives the minority shareholders a sense of fairness in the transaction, which would make them less resistant to the possibility of an outright sale.
The right to drag along is a right that usually enables the right holder to force the other shareholders to sell his shares in the Company along with him. The right operates to protect the interests of the right holder as certain buyers are looking to have control over the Company and drag along rights aid in eliminating the minority shareholders.
Put option is a contractual right (but not an obligation), wherein the right holder, has the right to sell a fixed number of shares at a fixed price within a specified time. For the Investor, put options also present an exit opportunity. Call option is a contractual right (but not an obligation), wherein the right holder has the right to buy a fixed number of shares at a fixed price within a specified time.
The Promoters agree to carry out an IPO after the lapse of a certain period of time after the completion of the investment in order to provide an exit to the Investors as they are able to offer all of their shareholdings in such an IPO. If the legal requirements mandate that certain shares should be subject to lock-in, the Promoters’ shares shall be locked in as required. Also, the Investors are not to be identified as the Promoters anywhere in the prospectus or at any time during the issue.
Third-party sale is the exit option made available to Investors when the Company has failed to carry out an offer for sale in an IPO, thereby depriving the Investors of an exit or alternatively in a case where the Parties have consented to an exit before the IPO. If the Company has not carried out an offer for sale in an IPO within the agreed-upon time period, the Investors can cause the Company to identify a bona fide third-party purchaser who shall purchase the Investor shares at a price acceptable to the Investors or pre-decided between the Investors and the Promoters and provide the Investors with an exit from the Company.
Buy-back of the Investor shares (partial or full) is another exit option provided to the Investor. The Investor causes the Company to carry out a buy-back of the Investor shares, subject to the existing regulations and laws and the Company is bound to buy-back the Investor shares. The price for the shares is to be mutually determined among the parties and if such mutual agreement is not reached, usually the valuation done by an independent reputed CA firm is considered to be acceptable. If owing to the existing regulations, all Investor shares cannot be bought in one buy-back, the Company shall buy back the shares in the subsequent years. Also, the Promoters and the shareholders agree to not offer their shares during a buy-back that has been initiated by the Investor.
Shareholders’ exit rights in Singapore are governed by the Companies Act (Chapter 50) and the Securities and Futures Act (Chapter 289). These laws provide a framework for the buying and selling of shares in a company and the regulation of the securities market.
Under the Companies Act, a shareholder has the right to transfer their shares, unless there is a restriction in the company’s constitution or by law. For instance, the company’s articles of association may contain provisions restricting the transfer of shares, or a shareholder may be subject to a lock-up agreement, prohibiting them from transferring their shares for a specified period.
Some legal remedies are also accorded for the minority shareholders through which courts have time and again in the interest of minority shareholders given them a bail-out package. Shareholders can claim relief under Section 216 (action for oppression under the Companies Act, 1967.
Minority shareholders like the Oppression Remedy because of its broad application and the adaptable remedies offered, which directly benefit them, as opposed to derivative actions, which do not confer direct benefit to the minority shareholders. The courts may order the purchase of shares from an oppressed minority or division of assets upon wound-up as part of an oppression remedy. Since this is an element of the shareholder’s claim, the flexibility of the remedies provided by this mechanism includes the potential to grant the firm damages for directors’ duty violations.
The breach (or, more commonly, breaches) of the written contract and/or legitimate expectations between the shareholders must result in commercial unfairness to the aggrieved shareholder and should be an objective criterion to be demonstrated on the factual matrix of each specific case. Some of the cases are:
The Court of Appeal case of the Over & Over Ltd. v. Bonvests Holdings Ltd.[1], Court of Appeal case. Here, a two-party joint venture’s minority stakeholder discovered that its interests were often ignored. The Court of Appeal determined that although none of the incidents stood alone to prove oppression, taken as a whole, they provided unmistakable proof of unfairness and oppressive behaviour. The Court of Appeal specifically ruled that the decision to issue shares by the majority to reduce the voting power of the minority in the context of the parties’ initial expectation of a quasi-partnership constituted oppression. The court in this case ordered the majority shareholders to buy the minority shares at a fair market value which would be ascertained by an independent valuer, or the joint venture would be wound up.
In the case of Lim Swee Khiang v Borden Co (Pte) Ltd[2], petitioners applied to claim oppression remedy. The minority shareholders in this case applied for the winding up of the company under Section 216 of the Companies Act. The Court of Appeal found that the majority shareholder instead of furthering the commercial interest of the company had acted in a manner that promoted the commercial interests of another company, which was set up by one of the majority shareholders, neglecting the Company’s commercial interest. The court in this case held that winding up won’t be a sufficient remedy and ordered the majority shareholders to buy the shares of the minority.
Section 254 of the Singapore Companies Act (Cap. 50) authorises a shareholder to petition a court for the winding up of a company if doing so is “fair and equitable”. A shareholder should only request the winding-up of a company if there are good reasons for doing so, such as if it is the only remedy that will adequately address the injustice experienced by the shareholder in question. This is because winding up a company is typically thought of as a last-resort remedy.
In some cases of winding up the application on “fair and equitable grounds”, courts can order a buy-out of shares, where the company is still viable notwithstanding the breakdown in the relationship between the shareholders (sections 254(2A)-(2B), Singapore Companies Act (Cap. 50)). With this remedy, the court is given more discretion and may order a buyout by the company, the majority shareholders, or both in place of a winding up. When a court issues a buy-out order for the company, the order may also provide for a capital reduction.
In conclusion, shareholder exit rights are an important aspect of corporate governance that provide investors with an avenue to exit their investments in a company under certain circumstances. These rights can include the ability to sell shares, the right to demand a buyback of shares, or the right to participate in a tender offer. While these rights can provide shareholders with flexibility and liquidity, they can also create challenges for companies, such as increased costs and potential conflicts with other shareholders. As such, it is important for companies to carefully consider the implications of these rights when designing their corporate governance structures. Ultimately, a well-designed exit rights framework can help balance the interests of both shareholders and companies, contributing to a more efficient and transparent market for corporate ownership.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For your Free First Consultation or if you simply require more information, email us at info@silvesterlegal.com.
[1] Over & Over Ltd. v. Bonvests Holdings Ltd. [2010] 2 SLR 776.
[2] Lim Swee Khiang v. Borden Co (Pte) Ltd. [2006] 4 SLR(R) 745.