Pre-incorporation Matters
In Singapore, the Companies Act is the focal statute that oversees and regulates the incorporation and registration of companies.
If you are looking forward to setting up a company in Singapore, you have to consider a few key things first.
To start with, individuals who want to register a company in Singapore should take into account the various contracts that promoters initiated or entered into in the past before incorporation.
Promoters
Who is a promoter?
Even though the definition of a “promoter” is not categorically defined in the Companies Act, the general description is “an individual who agrees to set up a corporation in order to carry out operations aimed at fulfilling specific project objectives over a period of time.”
A promoter can either be an individual or a group of persons who are willing to collectively take the required steps to achieve that purpose by carefully preparing a plan to incorporate or set up a company.
What are Promoters’ Fiduciary Duties?
In simple terms, “fiduciary” refers to the trust bestowed to an individual or company to act on behalf of shareholders or beneficiaries.
As such, promoters have a key responsibility of carrying out a number of fiduciary duties for your company in such a way that they uphold the trust that is expected of them from all shareholders.
Since one of the leading day-to-day responsibilities of a promoter is to promote your company as soon as it is incorporated, they are obliged to act reasonably and judiciously at all times
Their actions go a long way in ensuring that your company does not engage in or trigger any unnecessary conflicts of interest, and at the same time carry out their stipulated duties in support of your business entity.
For that reason, the fiduciary duty of a promoter is to ensure that your company is free from undisclosed profits. They are responsible for disclosing all transactions that your company intends to enter into to all shareholders.
Pre-incorporation Contracts
As explained in the previous section, the promoters have the fiduciary responsibility of initiating and actively becoming involved in pre-incorporation contracts.
Before choosing a promoter for your company, you must be cautious enough to know that all their decisions at the onset spreads over the lifespan of your business operations, which may have an impact on the future success of your company.
Despite the fact that the Accounting and Corporate Regulatory Authority Singapore (ACRA) only recognises the existence of your company immediately you notify them about your intention to register it, there are a number of occasions where your promoters must enter into various pre-incorporation contracts beforehand.
As a case in point, unless you want to operate your business purely online, your promoters have to make preliminary agreements to buy or rent a space and other related property. You must also ensure that you recover a number of expenditures associated with the above mentioned.
The execution of these pre-incorporation contracts by your promoters must be spot-on and accurate in order to ensure that all parties involved give the go-ahead to the terms and conditions before signing them. The following is an illustration of an execution clause that your promoters may use at one point:
“By [name of promoter] for and on behalf of [mane of company Pte Ltd] a company-to-be-incorporated.”
Status and Ratification of Pre-incorporation Contracts
You have to take the next statement very seriously because it can either build or break your company!
Any contracts entered into by your promoter before the actual incorporation is not binding because ACRA considers your company non-existent up to the point where you give notice to them about your intention to register it.
Now read the above statement again!
If your company enters any contract with any party before incorporation, any legal disputes arising from such arrangements make the promoter or any other person acting on behalf of your business entity personally responsible for all issues tied to that contract.
As stipulated in the Companies Act, all individuals, groups or companies that enter contracts in the best interests of a company before its actual incorporation are held responsible for all issues arising from the contract.
However, you can protect your promoters from such personal liabilities by clearly indicating in the contract that they are excluded from any legal actions that may arise once it is signed.
Another key provision in the Companies Act aims at addressing the approval of contracts that promoters enter into on behalf of a company before the actual incorporation. It is important for you to ensure that all contracts are executed by your company itself or by any individual who is acting in the best interests of your company.
Express and Implied Ratification
If you are ready to incorporate a company, you can use two ways for contract approvals
- Express ratification
- Implied ratification
When it comes to express ratification, your company chooses to approve a contract as soon as the resolution to adopt it takes effect.
Below is an example of a resolution that triggers the adoption of a contract through express ratification:
RESOLVED THAT the Company hereby approves ratifies and confirms the agreement dated _________ between Party 1 and Party 2 (as [trustee/agent] on behalf of the Company) (the “Agreement”).
On the other hand, if you choose to approve contracts through implied ratification, the said contract comes into force after your company explicitly carries out certain duties that renders it binding.
As a case in point, your company can consider a contract binding as soon as you start selling goods or services purchased under a specific deal. In essence, once your company starts the sales, it confirms the contract. In other applicable scenarios, even inactivity and silence can lead to the approval of contracts entered by your company.
Impacts of Ratification
When your company enters a contract through ratification, it is always dated at an earlier date that your promoter or the individual acting on behalf of your company first claimed it was entered.
As such, the contract is usually treated as having been valid from the time when it was initiated or executed.
In view of that, the contract will be binding to your company as if it was already existing as at the date when your promoter entered into the contract and became a party to it.
Shareholders’ Agreement
Prior to incorporating your company, you need to mobilize your shareholders with the aim of formulating a shareholders agreement that will manage them.
It is important to clarify that the constitution of your business entity qualifies as a legal contract between or among shareholders. However, each of them may as well become involved in separate agreements that recognize or handle their individual interests in various ways that they may consider suitable or binding in their own terms.
Since these agreements can be made by some or all shareholders in your company, it is usually known as a “shareholders’ agreement” or in other words, a “joint venture agreement”.
However, your company is not required to enter into such agreements. The privileges and responsibilities of those involved in the shareholders’ agreement are often systematically set in accordance with those outlined in the constitution of your company.
What is the Difference between the Shareholders' Agreement and the Company Constitution?
To start with, you need to know that when you have both the company constitution and the shareholders’ agreement managing various activities, two contracts will be in force!
When relationships among your shareholders are governed by both, they are subjected to certain differences even though both are equally binding and carry their own legitimate power.
A shareholders’ agreement and your company’s constitution are different in 2 key ways.
First, the obligation and rights of all shareholders associated with their membership are overseen by the company constitution.
Therefore, in instances where you become a shareholder of a company, you automatically become part and parcel of the statutory contract.
If your membership as a shareholder comes to an end, you also automatically cease to subscribe to the terms and conditions defined in the statutory contract.
On the other hand, a shareholders’ agreement is formulated by piercing together a number of personal responsibilities that do not affect or are not binding to other shareholders who are not party to it.
Essentially, in case your company requires new shareholders to subscribe to an existing shareholders’ agreement, you must ensure that a deed of accession ratifies such arrangement.
Second, if you want to amend a statutory contract, you don’t need approval from all shareholders in the company. You only need to strictly follow the stipulated procedures in the Companies Act as well as the statutory contract itself, which generally outlines the required majority.
In addition, all parties who are part and parcel of the shareholders’ agreement must approve any modification scheduled to be done on it. In most cases, you’ll find that members use the same provisions outlined in the company constitution to formulate the shareholders’ agreement.
While it is a usual occurrence to amend the constitution without notifying or seeking approvals from all shareholders in the company, some members’ rights may be altered against their will. This usually occurs when the shareholder cannot garner sufficient votes in order to change the course of a special resolution.
In such circumstances, the shareholders would accept all modifications to the company constitution irrespective of whether they violate his/her rights or not.
In contrast, when it comes to the shareholders’ agreement, modifying the any provisions without the consent of other shareholders would lead to a contractual remedy against the breaching counterpart.
Conclusion - Pre-incorporation Matters
If you want to incorporate a company and need guidance on pre-incorporation procedures without a hitch, contact us today and we will take it up every step of the way.