Shareholders’ Agreement in Malaysia: A Guide for Business Owners
A Shareholders’ Agreement helps shareholders establish clear rules from the beginning and sets out their respective rights, responsibilities and expectations.
When starting a company with other shareholders, it is easy to focus on the exciting parts — growing the business, attracting customers and making a profit.
However, disagreements may arise as the business grows. Shareholders may have different expectations about how the company should be managed, how profits should be distributed, or what should happen if someone wants to leave.
A Shareholders’ Agreement helps shareholders establish clear rules from the beginning and sets out their respective rights, responsibilities and expectations.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is an agreement entered into between some or all of the shareholders of a company to regulate their relationship with one another and, depending on the terms of the agreement, the management and operation of the company.
It can complement the company's constitution and provide more detailed arrangements on matters that are particularly important to the shareholders.
What should a Shareholders’ Agreement cover?
The terms will depend on the nature of the business and the relationship between the shareholders. Some common matters include:
1. Shareholding and Capital Contributions
The agreement can record the shareholding of each shareholder and address how additional funding for the company will be provided.
For example, if the company requires additional capital in the future, will all shareholders be required to contribute according to their respective shareholding percentages? What happens if one shareholder is unable or unwilling to contribute?
Having an agreed mechanism can reduce uncertainty when the company requires further funding.
2. Roles and Responsibilities
Not every shareholder will necessarily be involved in the day-to-day operation of the company.
Some shareholders may be actively managing the business while others are primarily investors.
The agreement can clearly set out the roles, responsibilities and expectations of the shareholders who are involved in running the company.
3. Decision-Making
One of the most important matters to address is how decisions will be made.
Ordinary business decisions may be made by the board or management. However, shareholders may agree that certain major decisions require a higher level of approval.
These may include matters such as:
- taking on substantial borrowings;
- issuing new shares;
- selling significant company assets;
- changing the nature of the business;
- entering into major transactions; or
- selling or winding up the company.
This can be particularly important where one shareholder holds a majority of the shares.
4. Appointment of Directors
The agreement may provide shareholders with rights relating to the appointment or removal of directors.
For example, where there are two major shareholders, each may be given the right to nominate a director to the board.
This helps establish how shareholders will be represented in the management of the company.
5. Dividends and Distribution of Profits
Shareholders may have different expectations regarding profits.
One shareholder may prefer profits to be reinvested into the business for expansion, while another may expect regular dividends.
A Shareholders’ Agreement can establish an agreed framework for how profits and dividends are to be dealt with, subject to applicable law and the company's financial position.
6. Transfer of Shares
What happens if a shareholder wants to sell his or her shares?
Without an agreed mechanism, disputes may arise over who the shares can be sold to and how they should be valued.
The agreement can provide procedures such as requiring the departing shareholder to first offer the shares to the existing shareholders before selling them to an outsider.
It can also set out how the price of the shares is to be determined.
7. What Happens When a Shareholder Wants to Leave?
A shareholder may eventually wish to retire, pursue another business or simply exit the company.
The agreement can provide an agreed exit mechanism, including:
- when a shareholder may sell his or her shares;
- whether the other shareholders have a right to purchase them;
- how the shares will be valued; and
- the timeframe for completing the transfer.
Having these matters agreed in advance can make an eventual exit significantly easier to manage.
8. Death or Incapacity of a Shareholder
The death or incapacity of a shareholder can create uncertainty for both the company and the remaining shareholders.
A Shareholders’ Agreement can provide for what happens to the affected shareholder's shares, including whether the remaining shareholders have an option or obligation to purchase those shares and how their value will be determined.
9. Deadlock Between Shareholders
This is particularly important for companies owned equally by two shareholders.
For example, if two shareholders each own 50% of the company and cannot agree on an important business decision, neither side may have sufficient voting power to resolve the issue.
The agreement can establish a procedure for dealing with such a deadlock.
Depending on the arrangement between the parties, this may involve negotiation, mediation, a buy-out mechanism or another agreed exit procedure.
10. Confidentiality and Restrictions
Shareholders may have access to commercially sensitive information such as customer information, pricing, financial information, business strategies and trade secrets.
The agreement can impose confidentiality obligations and may also contain appropriate restrictions concerning what a shareholder can do during and after his or her involvement with the company, subject to applicable law.
11. Resolving Disputes
Business disagreements do not always have to end in litigation.
A Shareholders’ Agreement can provide a procedure for resolving disputes, such as requiring the shareholders to first attempt negotiation or mediation before commencing legal proceedings.
Establishing the procedure while everyone is still on good terms can make disputes easier to manage later.
“We are friends. Do we really need a Shareholders’ Agreement?”
Many businesses begin between friends, relatives or people who have worked together for years.
That trust is valuable — but it does not mean everyone will always have the same understanding of the business.
As the company grows and more money becomes involved, shareholders may develop different expectations about management, salaries, dividends, investment and the future direction of the company.
A written Shareholders’ Agreement provides a clear reference point when those differences arise.
It is often much easier to agree on the rules before there is a disagreement than after one has already occurred.
Partnership Agreement vs Shareholders’ Agreement
These two agreements are sometimes confused.
Generally, a Partnership Agreement regulates the relationship between partners carrying on business as a partnership, whereas a Shareholders’ Agreement regulates the relationship between shareholders of a company.
The appropriate agreement therefore depends on the structure through which the business is being carried on.
If you are starting or investing in a company with other shareholders, it is worth considering a properly drafted Shareholders’ Agreement before substantial money, time and effort are invested into the business.
Need a Shareholders’ Agreement drafted or reviewed?
Eng Chambers assists companies, founders and investors with drafting and reviewing Shareholders’ Agreements tailored to shareholding arrangements, decision-making, directors, dividends, share transfers, exits and deadlock mechanisms.