Eugene Thuraisingam LLP x Founders Doc: Legal Strategies for dealing with Co-Founder Disputes in Singapore
Legal Strategies for Co-Founder Disputes in Singapore by Suang Wijaya and Rachel Wong
Suang Wijaya, a Partner at Eugene Thuraisingam LLP, and Rachel Wong, Counsel at Eugene Thuraisingam LLP and the founder of Founders Doc, recently came together to share legal strategies for dealing with disputes between co-founders in Singapore.
This collaboration was one that was highly informative and holistic as it brought together perspectives that encompass both corporate and litigation-related aspects of such disputes. Put another way, by paying heed to Suang’s and Rachel’s advice, you will be well-versed with both the “defensive” and “offensive” mechanisms in relation to co-founder disputes.
With Rachel’s expertise in corporate law and familiarity with early-stage companies in the region, she is best-placed to advice on must-dos to ensure that such disputes can be avoided. Further, she also offers advice on how there can be structure and certainty even when trouble in paradise does occur.
On the other hand, Suang is an experienced disputes lawyer in Singapore who has litigated and advised on many shareholder and co-founder disputes before. Though his advocacy and battles both inside and outside of Courts and Arbitration Tribunals, he has developed an understanding of how to put your best foot forward and get the best outcome possible in a manner that is cost and time-efficient.
As many clients of Eugene Thuraisingam LLP and Founders Doc will attest to, when both Suang and Rachel work in tandem, as they do in this video, you do have most, if not all, of your bases covered.
In the video, which was very well received on LinkedIn, Suang and Rachel discuss 3 of the most common co-founder disputes:-
- The 50/50 Tragedy
- Being ousted by a co-founder
- Minority Oppression
The 50/50 Tragedy – Disputes between co-founders and director who each hold 50% shareholding
In the first scenario, Suang and Rachel shared the best ways to deal with the 50/50 Tragedy. This is a term used to refer to one of the most common forms of disputes between shareholders. As the name suggests, this involves a dispute between two co-founders, both of whom are directors of the company who hold 50% of the company’s shares each.
Such scenarios are also referred to as a “deadlock” as, due to the dispute, the Company is unable to move as it may be impossible for decisions to be made.
Important Clauses in Co-Founder Agreements in Singapore
According to Rachel, one way that co-founder disputes can be anticipated and managed is through the use of co-founder agreements. A comprehensive co-founder agreement would contain mechanisms through which potential disputes can be managed. In the video, Rachel shared 2 such mechanisms.
The first is mechanisms where one co-founder may be bestowed veto rights over the shareholder. This veto right, if it is framed and drafted well, will allow one party to show the other “who’s boss” in certain specified scenarios despite the fact that both parties are directors and equal shareholders.
The second mechanism is a buyout clause which allows one founder, in the event of a irreconcilable dispute, to buy the other co-founder out either at a discount on the fair market value or at the fair market value of the shares itself.
If you have a co-founders agreement already, now would be a good time to check if there are mechanisms, like the 2 Rachel set out above, to manage disputes.
Litigating Co-Founder Disputes in Singapore
Where such mechanisms are absent or insufficient, co-founders who find themselves in a 50/50 Tragedy have, according to Suang, 1 of 2 options open to them.
The first option, which is more encouraged by lawyers as it helps all parties save time and costs, is for the co-founders to engage in without prejudice negotiations with a view to amicable resolution. In Suang’s experience, where both parties are negotiating in good faith and eager for a satisfactory outcome for all parties, some disputes may be resolved within a span of just 2 to 3 weeks.
Without prejudice negotiations are also encouraged by the Courts. Under the new Rules of Court 2021, which came into force in April 2021, parties have a duty to consider amicable resolution of the party’s dispute before the commencement and during the course of any action or appeal. Further, unless there are reasonable grounds not to do so, a party is also to make an offer of amicable resolution before commencing an action.
Should efforts to amicably resolve the matter outside of Court fail, an aggrieved party may then have no choice but to go to Court, or an arbitral tribunal, to seek a remedy such as the winding up of the Company or a Court-ordered buy-out.
Where matters are contentious, Suang estimates that resolution of a dispute between shareholders may take 6 months to more than a year.
What to do when your co-founder unilaterally kicks you out of the Company?
It is not unheard of for co-founders who were once as thick as thieves to go through what may seem like a “corporate divorce”. Suang and Rachel have advised many a co-founder who found themselves ousted or kicked out unilaterally by other co-founders.
In such situations, especially after much sleep, sweat, and tears have been poured into the company by the party that was hard done by, the temptation to retaliate is very real, and understandable.
It is for this reason that the first piece of advice Suang had to offer was for people who find themselves in such an unfortunate situation to simply resist responding, or doing anything, in the heat of the moment. It is likely that anything you say, including admissions or allegations, will be used against you in Court in the event that the matter escalates.
Instead, Suang explains, one should take the opportunity to gather and organise as much information as possible including, but not limited to, founding documents, email correspondence, Whatsapp or Slack communications, minutes of meetings, voice messages, etc.
Through these documents and correspondence, a lawyer will have a fuller picture of the dispute and your rights in relation to the other co-founder(s) and the Company. These documents also help to shed light on the merits, or lack thereof, of the other party’s allegations.
Once you have gathered all relevant documents and evidence, it would be wise to set out a chronology of events while your memory is still fresh. This table will also help your legal counsel understand the circumstances of your dispute quickly.
“Often times, you may be in a better position than you think you are in” – Rachel Wong, Counsel at Eugene Thuraisingam LLP and Founder of Founders Docs
Minority Oppression in Singapore
The final scenario that Suang and Rachel covered was that of Minority Oppression.
“Minority Oppression, as the name suggests, is where the majority uses their power to act in a manner that is prejudicial or unfair to your interests, even if they are entirely entitled to do so” – Suang Wijaya, Partner at Eugene Thuraisingam LLP
In the video, Suang gave several examples of situations that may amount to minority oppression in Singapore, including unilateral reduction of shareholding or diversion of a company’s business.
To assess whether you have a claim in minority oppression, you should seek the professional opinion of a disputes resolution lawyer in Singapore like Suang Wijaya.
Where circumstances are such that the majority in the company are not acting in the best interests of the company, an application may be taken out in Court for derivative action. Through derivative action, a minority shareholder may commence an action in the company’s name against another party who is not acting in the best interests of the company.
Protective Mechanisms in the Company’s Constitution or Shareholder’s Agreements in Singapore
On the corporate front, Rachel suggested that shareholders could include protective mechanisms in the shareholders’ agreements or the company’s constitution to deal with potential situations of minority oppression.
One such mechanism is termed “Reserved Matter” where clauses provide that certain actions cannot be taken by the company unless you agree with the decision. Such mechanisms help protect the interests of minority shareholders.
Co-Founder and Shareholder Disputes in Singapore
You may watch the video by Suang Wijaya and Rachel Wong at this link.
While the video by Suang and Rachel provide a useful primer on the topic, it is no substitute for tailored and fact-specific legal advice.
Should you require further legal advice in relation to co-founder disputes, or corporate and commercial matters in general, do contact Suang Wijaya and/or Rachel Wong via the appointment forms in the “Make An Appointment” tab above.
In the first scenario, Suang and Rachel shared the best ways to deal with the 50/50 Tragedy. This is a term used to refer to one of the most common forms of disputes between shareholders. As the name suggests, this involves a dispute between two co-founders, both