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Question:
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“Dear Lawyer Yeo, I am writing to seek your advice regarding the shareholders’ agreement.”
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“My brothers and I are currently operating a fruit export business. As our family business has grown over the years, our accountant recently suggested that we should set up a company (Sdn Bhd) for tax-saving purposes.”
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“Prior to this, my brothers and I had already discussed several key aspects, such as the shareholding percentage, distribution of profits, roles, and responsibilities of each of the siblings in the company. Fortunately, due to our family’s harmonious relationship, we reached a consensus on these issues.”
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“However, our accountant strongly advises all of us to execute a shareholders agreement and put everything in writing. Therefore, I would like to inquire:-“
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- Is a written shareholder agreement mandatory for companies in Malaysia?
- What are the key benefits of having a shareholder agreement?
- If we decide to proceed with a shareholder agreement, what essential issues should be discussed and stated in the agreement?
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“I would greatly appreciate your expert legal advice on these matters. Thank you.”
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IT IS MANDATORY TO HAVE A SHAREHOLDERS’ AGREEMENT AND WHAT ARE THE BENEFITS?
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1. A shareholders’ agreement is a legally binding contract entered into by a company’s shareholders. Generally, it outlines the shareholders’ rights and obligations, decision-making processes, and the company’s governance structure.
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2. In Malaysia, although shareholders agreement is not mandatory under the Companies Act 2016, a shareholders’ agreement is highly recommended for private companies. This is because the provisions of the Companies Act are broad and general, designed primarily to safeguard national interests rather than cater to the specific needs of individual companies.
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3. If the shareholders just solely rely on the general clauses in the Companies Act, this can leave gaps with no effective mechanism to address disputes between the shareholders. In such cases, the parties may be forced to seek legal remedies through the courts, which can be time-consuming and costly.
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4. In contrast, a shareholders’ agreement offers significant advantages. It serves as a critical framework for managing shareholder relationships and provides clear, enforceable mechanisms for resolving disputes. Additionally, founders can use a shareholders’ agreement to implement a dual-class share structure, granting them greater control over the company. This ensures their influence over key decision-making processes during shareholder meetings, safeguarding their vision for the company’s future.
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WHAT TERMS ARE TYPICALLY INCLUDED IN A SHAREHOLDERS’ AGREEMENT AND WHAT ISSUES SHOULD BE DISCUSSED BEFOREHAND?
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5. In a shareholders’ agreement, it will contain the following important clauses and it is advisable for the parties to discuss before engaging a lawyer:-
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A. Shareholders’ Contributions
The clause on shareholder contributions specifies the amount of capital each shareholder commits to invest in the company, the method of contribution (e.g., cash, tangible assets), and the timeline for such contributions.
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This clause is crucial as it clarifies shareholders’ financial commitments and helps mitigate disputes arising from non-compliance. It often includes provisions stating that if a shareholder fails to meet their contribution obligations, their shareholder rights may be affected, such as a reduction in their equity stake or the imposition of penalties.
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B. Appointment of Directors
The board of directors is a key decision-making body of the company. A shareholders’ agreement typically outlines the procedures for appointing and removing directors, the composition of the board, and its scope of authority. The agreement may specify the number of directors each shareholder or shareholder group is entitled to nominate, as well as the voting requirements for major board decisions.
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C. Dividend Policy
This clause governs the distribution of company profits, specifying how dividends are calculated and allocated among shareholders. It provides clarity on the distribution method and ensures transparency in profit-sharing when the company is profitable.
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D. Deadlock and Dispute Resolution
Decision-making deadlocks are common, particularly in companies with numerous shareholders or divergent opinions. A shareholders’ agreement will include clear mechanisms to resolve such disputes, including:
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Arbitration: Requiring disputes to be resolved through arbitration instead of litigation, thereby avoiding the complexity of public court proceedings.
Buy-Sell Provisions: Establishing mandatory buy-sell mechanisms that allow one party to purchase the shares of another in case of an impasse, ensuring the continuity of business operations.
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E. Management and Operations
This clause typically defines the company’s management structure, operational processes, and the division of responsibilities between shareholders and the management team. This includes the frequency of shareholder meetings, decision-making procedures, and the appointment of key management personnel.
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F. Financing and Issuance of New Shares
This clause details how the company will raise funds when required, including the obligations of shareholders, the methods and proportions of financing, and the impact of new financing on existing shareholdings. The agreement often includes pre-emptive rights, granting existing shareholders the first option to purchase newly issued shares, and preventing excessive dilution of their control by external investors.
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G. Transfer of Shares and Admission of New Shareholders
Shareholders’ agreements commonly outline the conditions and procedures for share transfers. Common provisions include:
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Right of First Refusal (ROFR): Allowing existing shareholders the first opportunity to purchase shares being sold by another shareholder.
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Restrictions on Transfer: Requiring shareholder approval or imposing conditions for transferring shares to third parties.
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Admission of New Shareholders: Stipulating unanimous consent from existing shareholders or adherence to specific rules for onboarding new shareholders.
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Share Pricing: Pre-agreeing on the pricing mechanism for share transfers or requiring independent valuation to ensure fair pricing.
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H. Protection of Minority Shareholders
To safeguard minority shareholders from potential abuse of power by majority shareholders, the agreement may include protective clauses. These provisions aim to ensure that minority shareholders are fairly represented in company decisions and that their interests are not overlooked or compromised.
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6. Although shareholders’ agreements are not mandatory under Malaysian law, they carry legal enforceability once executed. However, such agreements must comply with the provisions of the Companies Act 2016. Any clause in a shareholders’ agreement that conflicts with the Companies Act—for instance, by restricting fundamental shareholder rights or violating mandatory requirements for the company’s constitution—may be deemed invalid.
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HOW TO DETERMINE WHETHER A COMPANY NEEDS A SHAREHOLDERS’ AGREEMENT?
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7. A shareholders’ agreement can offer substantial protection for both the company and its shareholders, but not every company necessarily requires one. The decision depends on several key factors:
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A. Number of Shareholders
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Single Shareholder: If your company has only one shareholder, a shareholders’ agreement is unnecessary. The company’s constitution already outlines the shareholder’s rights and responsibilities.
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Multiple Shareholders: For companies with multiple shareholders, a shareholders’ agreement becomes essential, especially when:
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- Shareholders have different levels of involvement in the business.
- Potential conflicts of interest may arise.
- There is a need to formalize contributions and expectations.
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B. Company Size and Nature of Business
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Small and Simple Businesses: For small businesses with straightforward operations and minimal growth ambitions, a shareholders’ agreement might not be a priority.
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Growing or Complex Companies: As the company expands or diversifies, a shareholders’ agreement becomes increasingly important to manage governance, protect interests, and resolve potential disputes.
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C. Shareholders’ Backgrounds and Relationships
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High Trust Among Shareholders: If shareholders know and trust each other well, they may feel a shareholders’ agreement is unnecessary.
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Diverse or Mixed Interests: When shareholders come from different professional or cultural backgrounds or when the company includes external investors, management teams, or strategic partners, a shareholders’ agreement is critical.
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CONCLUSION
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8. Although a shareholders’ agreement is not legally required when establishing a private company under the Malaysian Companies Act, it offers significant legal protection for both the company and its shareholders. A shareholders’ agreement clearly defines the rights and obligations of shareholders, safeguards investors’ interests, prevents conflicts among shareholders, and promotes transparent and efficient corporate governance. For most companies with multiple shareholders, a shareholders’ agreement is a crucial document worth serious consideration.
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9. When deciding whether to implement a shareholders’ agreement, founders and shareholders should carefully evaluate their specific circumstances. If the relationships among shareholders are straightforward and uncomplicated, a shareholders’ agreement may not be necessary. However, if the company’s operations are complex or the relationships between shareholders are sensitive, implementing a shareholders’ agreement is undoubtedly a prudent choice.
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The above is the legal information we would like to share with our readers today with regard to the shareholders’ agreement in Malaysia. If you have any legal questions or would like to engage a law firm to prepare this corporate document, you can contact us via WhatsApp: https://wa.link/q3kmv5
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