Shareholders’ Agreement in Malaysia

A shareholders’ agreement is a legally binding contract that defines the rights, obligations, and responsibilities of shareholders within a company. It plays a pivotal role in maintaining a harmonious business relationship.

Not only does a shareholders’ agreement serve as a roadmap for your business journey, but it also addresses critical aspects. Examples include dispute resolution, ownership percentages, and exit strategies, ultimately safeguarding your business interests.

The confidentiality clauses within a shareholders’ agreement can protect your business’s sensitive information, trade secrets, and intellectual property from being disclosed or misused.

Shareholder Requirements in Malaysia

A private limited company must possess at least one shareholder and is restricted to a maximum of 50 shareholders.

The shareholders of the company may include individuals or corporate entities.

Rights of a Shareholder

According to Malaysian law, shareholders have the following rights:

• Attend and actively engage in company meetings.
• Receive dividends.
• Cast votes in the election and appointment of directors.
• Access company-related information.
• Acquire newly issued company shares.
• Sell existing shares.
• Initiate legal action against directors for breaches of duty.
• Nominate directors and submit shareholder resolutions.
• Exercise voting rights during general meetings.

The Importance of having a Shareholders' Agreement

• Conflict Resolution: Resolve disputes amicably without costly legal battles.

• Ownership Structure: Define ownership percentages and capital contributions.

• Fairness and Clarity: Ensures a fair distribution of shareholder roles and responsibilities.

• Exit Strategies: Plan for unforeseen circumstances like a partner’s departure.

• Protect Business Secrets: Safeguard confidential information and trade secrets.

When a company lacks a formal shareholders’ agreement and only relies on an oral agreement, the court is compelled to ascertain the accuracy of each party’s claims based on the evidence, facts, and circumstances presented during the proceedings.

Choosing the Right Firm and Shareholders' agreement Lawyers

Our consultations start with a detailed discussion of your business objectives and concerns to understand your unique needs. This is followed by expert guidance to ensure your agreement aligns with Malaysian business laws. Our experienced lawyers will assist you in creating, reviewing, and amending your shareholders’ agreements .

FAQs

What legal advice do you offer throughout the process?

We provide ongoing legal advice and support to ensure your shareholders’ agreement aligns with your evolving business needs. Check out the differences between a shareholders’ agreement and a company constitution . Find out how we charge our legal fees here.

Does a Shareholders’ Agreement need to be updated?

Yes, a Shareholders’ Agreement can undergo updates to align with shifts in the company or shareholders’ circumstances. Normally, a Shareholders’ Agreement will contain a provision permitting amendments with the unanimous consent of all shareholders.

Regularly reviewing and revising the agreement is advisable to accurately reflect the company’s current and shareholders’ situations. Misunderstandings and disputes can also be prevented.

Certain scenarios highlight the importance of updating a shareholders’ agreement, including:

• Changes in Ownership or Control: When alterations occur in the company’s ownership or control, such as adding or removing shareholders or share transfers, updating the agreement becomes necessary to accommodate these adjustments.

• Shifts in Company Operations: Significant changes in the company’s operations, such as expanding into new markets or introducing new products or services, may require an update to ensure the agreement remains relevant and suitable.

• Changes in Shareholders’ Circumstances: Should a shareholder’s circumstances change, such as marriage, divorce, or the addition of a child, revisiting the shareholder agreement is essential. This ensures fairness and reasonableness for all parties involved.

When do you need a Shareholders’ Agreement?

Here are some common scenarios where such an agreement can be helpful:

• Multiple Shareholders: When a company has multiple shareholders, a shareholders’ agreement can clarify their rights and responsibilities, creating a framework for decision-making and dispute resolution.

• External Investors: In cases where external investors fund the company, a shareholders’ agreement safeguards their interests by outlining the use of investments and compensation terms.

• Multiple Founders: When a company has more than one founder, such an agreement can establish ownership terms, define founder roles, and provide a mechanism for resolving potential disputes.

• Family Business Succession: In family businesses passing down to the next generation, a shareholders’ agreement helps determine ownership and control transfer terms, ensuring the interests of all involved shareholders are protected.

​​When a new shareholder joins the company, does the Shareholders’ Agreement automatically bind the new shareholder, or must a new agreement be signed again?

A Shareholders’ Agreement functions as a contractual arrangement among existing shareholders, meaning the original Shareholders’ Agreement does not inherently obligate a newcomer to the company.

Typically, the Shareholders’ Agreement will specify that a new shareholder seeking to join the company must execute a deed of adherence with both the company and the existing shareholders to become legally bound by the provisions outlined in the Shareholders’ Agreement.

How are shareholder disputes typically resolved?

​​​​The resolution of such conflicts varies depending on the nature of the disagreement and the specific clauses within an existing shareholders’ agreement. Here are several potential approaches:

• Exit Mechanisms: These contractual provisions within a Shareholders’ Agreement enable shareholders to sell or transfer their shares under predefined circumstances. Such mechanisms prove beneficial when shareholders seek to exit the company due to factors like deadlock, retirement, illness, or personal changes.

• Negotiation: Parties involved in the dispute may attempt to settle their differences through direct negotiation, either independently or with the assistance of legal counsel or a mediator.

• Mediation: Mediation is a voluntary, confidential process wherein a neutral third party facilitates collaboration to reach a mutually agreeable resolution. It often offers a less formal, quicker, and more cost-effective alternative to other dispute resolution methods, suitable for parties willing to cooperate in finding a solution.

• Arbitration: Arbitration involves a formal process where an arbitrator or panel hears both sides of the dispute and renders a binding decision. Contrary to common belief, arbitration may not necessarily be faster or less expensive than court proceedings. Typically, the arbitrator’s decision is final and cannot be appealed.

• Litigation: Litigation entails initiating formal legal proceedings in court, with a judge adjudicating the dispute. Litigation can be a protracted and costly process, and the court’s ruling is legally binding on the parties involved. In certain cases, there may be opportunities for an unsuccessful party to appeal a lower court’s decision.

The choice among these options hinges on the dispute’s specific circumstances, the parties’ preferences, and the stipulations within the shareholders’ agreement. In some instances, a combination of methods may be employed to resolve.

Does a Shareholders’ Agreement require stamping, filing, or registration to be valid?

A Shareholders’ Agreement becomes legally binding upon the signatures of all involved parties, even if it lacks a stamp. However, the Shareholders’ Agreement cannot be presented as evidence in a court of law until properly stamped.

There is no requirement to file or register a Shareholders’ Agreement. It operates as a standard contract, akin to other business agreements, and serves exclusively for internal purposes.

Can the Shareholders’ Agreement supersede the statutory requirement of the Companies Act 2016?

A Shareholders’ Agreement cannot override statutory requirements. While shareholders can mutually agree within the Shareholders Agreement to undertake actions beyond what the Companies Act 2016 (*external, nofollow link) mandates, a breach of the Shareholders’ Agreement, even if it doesn’t breach the Companies Act 2016, may lead to legal action by the other party, including claims for damages.

It is best to consult a legal team before drafting your agreement.

Does a Shareholders’ Agreement supersede the Constitution?

Shareholders can insert a provision in the Shareholders’ Agreement indicating that the Shareholders’ Agreement takes precedence over the Constitution in the event of a conflict.

However, it’s important to note that this shareholders’ agreement does not legally bind the company unless it is formally included as a party.

What are the risks of drafting a Shareholders’ Agreement without a lawyer?

Creating a Shareholders’ Agreement without legal counsel’s involvement carries inherent risks, given that the agreement holds legal weight and can profoundly impact shareholders and the company.

Below are potential pitfalls to consider:

• Incomplete or Insufficient Provisions: Without the guidance of an experienced lawyer, it can prove challenging to include essential provisions in the shareholders’ agreement tailored to your specific situation. Addressing critical aspects such as ownership, control, decision-making, dispute resolution, and exit mechanisms may also fall short.

• Unforeseen Legal Complications: Lawyers can identify and tackle potential legal complications within the shareholders’ agreement, such as conflicts with other contracts or laws, as well as issues related to taxation, employment, or intellectual property.

• Ambiguity or Inconsistency: Absent legal expertise, ensuring clarity, precision, and consistency in the shareholders’ agreement may be daunting. This can lead to misunderstandings and disputes among shareholders due to vague or conflicting terms.

• Enforcement Challenges: If the Shareholders’ Agreement is not drafted correctly or executed, enforcing it in court may become arduous or unattainable.

In summary, seeking legal consultation is generally advisable when drafting a Shareholders’ Agreement. Our corporate law firm in Kuala Lumpur specialises in Shareholders’ Agreements and can ensure your agreement aligns with your unique circumstances and is comprehensive, legally sound, and enforceable.