In Malaysia, there is no legal requirement that mandates companies to have a shareholders’ agreement. A company can very well function with or without a shareholders’ agreement.
While it’s not legally required, it is still strongly recommended and considered a good practice to have a shareholders’ agreement, especially for companies with more than one shareholder. This is because a shareholders’ agreement protects not only the interests of the shareholders but also the interests of the company. For instance, a shareholders’ agreement helps to set out the rights and obligations of each shareholder. If a shareholders’ agreement is absent and the company has no defined roles and voting rights for the shareholders, it can lead to misunderstandings and disputes among the shareholders. As a result, it could affect the decision-making processes, thus disrupting the company’s operations and potentially leading to financial loss or, in extreme cases, bankruptcy.
Therefore, a company is advised to have a well-drafted shareholders’ agreement in place to govern the rights and obligations of the shareholders as well as to protect the interests of the company as a whole.
There are 5 key considerations when drafting or entering into a shareholders’ agreement.
1. The roles and obligations of the shareholders must be clearly defined and specified.
The roles and obligations of the shareholders in a company include the voting rights, financial obligations, ownership of shares, fiduciary duties and more. Having a clear and unambiguous shareholders’ agreement would help to prevent misunderstandings and disputes among the shareholders as well as between the shareholders and the company.
2. There must be transfer of shares provisions.
These provisions will address matters such as the rights and obligations of shareholders concerning the purchase or sale of their shares, the procedures for selling and transferring shares, the conditions that must be met prior to selling or transferring shares, and the situations that may lead to the transfer of shares. Additionally, they will outline any restrictions or approvals required for such transactions and provide clarity on the valuation methods to determine share prices.
3. Pre-emptive rights and right of first refusal clauses is essential to protect the shareholders and the company.
Both clauses on pre-emptive rights (also known as ‘anti-dilution rights’) and right of first refusal give priority to the existing shareholders whereby the newly issued shares or the existing shares are offered to existing shareholders for purchase before they are offered to a third party or external investors respectively. This helps to maintain control and stability within the company’s ownership structure and operation.
4. Dispute resolution clause serves as an avenue for parties in cases of misunderstandings or disputes.
More often than not, disputes arise between the shareholders or the shareholders and the company. As such, the parties may rely on a dispute resolution clause to enforce their rights as well as to safeguard their interests. A dispute resolution clause comprises of proper and structured procedures which act as guidelines for parties to achieve amicable resolution or settlement.
5. The Shareholders’ Agreement must be in compliance with the law as well as the Articles of Association/ Company’s constitution.
Any provisions within the Shareholders’ Agreement should align with the requirements and provisions of the Companies Act, 2016 as well as any other applicable laws or regulations related to corporate governance and shareholder rights in Malaysia. If a clause contradicts a mandatory provision of the Act, that specific clause may be considered void and unenforceable.
Likewise, a shareholders’ agreement must be in harmony with the company’s constitution. This is to prevent potential legal actions that may arise due to disagreements or disputes regarding contradictory clauses.