A shareholder agreement Malaysia is an important document to regulate the relationship between shareholders of a limited company.
This article explains the benefits of having one, and the main terms to be included.
A shareholder is a legally binding agreement between multiple shareholders in a company on several important things. It is like a partnership agreement in Malaysia between partners.
The benefits of having these shareholder contracts include:
Clarity
It allows the shareholders, sometimes known as stockholders, to agree on certain important things in running the companies, such as decision-making, how to resolve disputes, and exit plans.
This preserves shareholder relations and minimises any shareholder disputes and any potential disputes between them
Protect the rights of company shareholders
Generally, majority shareholders have bigger rights in deciding on matters because of high-voting rights. Thus, it raises alarm amongst certain shareholders, especially minority shareholders, that their interests may be affected.
To solve these specific shareholder concerns, they can agree that certain matters require 75% of the voting rights. (as opposed to the majority: 51%). By having these shareholders arrangements, it can minimise any potential litigation shareholder proceedings.
Confidentiality
A shareholder agreement can be a confidential and private document, as it is not required to be submitted to the Companies Commission of Malaysia (SSM). It is unlike a constitution, another organizational document, that, due to the statutory requirement, is required to be submitted to the SSM and can be accessed by the public.
Timing and Requirement of Agreements
One can get these shareholder agreements ready during:
Company formation stage
This is the best time when the document lists the rights and obligations of each party involved before the company starts operating. Without this agreement, shareholders may face disputes later on.
Joint ventures
if the shareholder agreements are not in place during the formation stage, then the shareholders can have them when the companies intend to go into major joint ventures/projects where a larger amount of capital is required.
Furthermore, the shareholder agreement should:
Comply with the law
All contracts in Malaysia, including shareholder contracts, must comply with the Contracts Act 1950. As shareholder agreements are related to companies, they must also comply with the Companies Act 2016.
Any terms in shareholder agreements should align and not conflict with the statutory requirements in the Companies Act. If there is any inconsistency, the Companies Act will prevail.
Consistency with Constitution
The shareholder agreement also should be consistent with the company constitution. The constitution is part of additional governance documents that state the running and corporate governance of companies.
The main difference between a constitution and a company is that the constitution states the running of the company as a whole, whereas a shareholder agreement merely records the agreement between the shareholders.
If there is any conflict between the shareholder agreement and the constitution, generally it won't supersede the constitution unless a company is made a party to the agreement.
Common Clauses and Amendments
Common clauses in a shareholder agreement include:
Company shareholding structure
It includes the number and details of the shareholders, current issued and paid-up share capital, type of shares, and percentage of shareholding in each shareholder.
It also states whether any matter requires a specific type of shareholders resolution (ordinary resolution: 51% majority or special resolution: 75%)
Directors
It states how many directors a shareholder can appoint to represent him on the Board, the removal of that appointed director, and who can appoint the Chairman of the Board general meeting from amongst the directors.
It also states the quorum on how the Board meeting runs and votes (that is, how many directors are to be present and vote) and who can decide on the appointment of the key posts such as managing director, deputy managing director, and other key posts.
Obligations
It states other duties of the shareholders, apart from contributing to the share capital. It is optional, as generally the running of the companies is left to the directors and employees.
Dividend policy
This includes when and how much dividend the company should declare per specified period, such as in a year. Usually, this is made optional and subject to the Boards’ approval, as dividend policy should not affect business objectives such as growth.
First right on shares transfers
This requires the involved shareholders to offer to sell their shares to the existing shareholders in equal proportion to their current shareholdings if there is any intent by the shareholder to sell the shares. This maintains the shareholding ratio amongst the current shareholders.
This also applies when the shareholder dies, where the shares must be first offered to the existing shareholders. If the existing shareholders agree to purchase, then the administrator of the estate is required to comply with the mutual agreements by performing the share transfers
If the existing shareholders refuse to accept that, then the shares can be sold to the other parties and the new shareholders are usually required to sign a deed of adherence to agree to the current arrangements.
Shares valuation
This states the valuation of the shares if the shareholder intends to sell the shares. It can be fixed by a certain formula or being decided by an independent third party, such as by an auditor, to prevent any potential conflicts on the valuation.
Deadlock and Exit
When the existing and original shareholders cannot agree on certain things, such as on a matter where unanimous consent is required but cannot be achieved, the dissatisfied shareholders can offer to sell all of their shares to the other shareholders at a certain price.
If the existing shareholders refuse to buy over, then it can offer to sell to another third party.
Tag Along
This allows the minority shareholder to tag along when the majority shareholder intends to sell its shares to any potential new shareholders on the same terms.
Dispute Resolution
If there is any dispute between the parties, which is usually due to a breach of the agreement, then they can choose the method to resolve the dispute. It includes mediation, arbitration, and litigation, whereby litigation (that is, through court proceedings) is the common method.
Amendment
This requires any amendment to the shareholder agreement to be agreed to by all parties.
Entire agreement
This means that the shareholder agreement is the entire agreement between the parties and supersedes all previous agreements between them.
A corporate lawyer in Malaysia can help you prepare the agreement. They are well-versed in company law and can also explain the differences between a contract of service vs contract for service.
If you need any assistance, you can contact us. Using shareholder agreement templates in Malaysia is not recommended as they may not contain all the terms and conditions above and some other matters that suit you can be omitted.
Update Agreements
There are times when a review and update of the agreement may be required, such as:
Changes in Ownership or Control
When there are major changes in the company’s ownership or control, the new shareholders might want to change the arrangements with the current shareholders
Changes in shareholders’ circumstances
If a shareholder’s life events change, such as marriage, divorce, or the birth of a child, reviewing the stockholders agreement may be necessary.
In this instance, having a new agreement to replace the existing agreement is advisable, especially when there are major changes.
Conclusion
Shareholder agreements in Malaysia are important to ensure that business operations run well and minimise conflict between the shareholders. If you are looking for a legal firm in Kuala Lumpur or have any enquiries, do contact us. Our team will assist you.
Frequently Asked Questions
1. What is shareholders agreement Malaysia?
A shareholder agreement is a legal document that sets the rights and obligations of shareholders in a Malaysian company. It governs their relationship, provides clarity, and helps prevent disputes.
2. What is included in a shareholders agreement?
The usual terms that are included are shareholding structure, right of appointment of directors, and first right on share transfers. Other clauses include share valuation and dispute resolution.
3. How do you create a shareholder agreement?
You can create a shareholder agreement by recording the common agreement between the shareholders on the main clauses, such as the first right on share transfers and share valuation. Using a shareholder agreement sample is generally not recommended.
4. What is the difference between shareholders agreement and constitution in Malaysia?
Shareholder agreements are contracts between shareholders, while the constitution states matters on the running of companies such as the appointment and termination of directors and business activity of the company.
