A shareholder agreement in Malaysia is an important legal document for businesses with two or more shareholders. It establishes the rights and responsibilities of shareholders and provides agreed rules on how important matters concerning the company will be handled.
While shareholders may begin a business with common objectives, disagreements can arise later over management, funding, dividends, appointment of directors, business direction, transfer of shares or the eventual exit of a shareholder.
A properly drafted shareholders agreement can address these matters from the beginning and provide a framework for dealing with situations that may otherwise lead to shareholder disputes.
For those searching for a shareholders agreement sample, shareholders agreement template, shareholders agreement format or shareholder agreement template Malaysia, it is important to understand that the appropriate provisions depend heavily on the company’s ownership structure and the commercial arrangement between its shareholders.
This guide explains shareholder agreements in Malaysia, the applicable legal framework, important clauses to consider and the difference between using a standard template and having an agreement prepared for the particular company and shareholders.
What Is a Shareholder Agreement in Malaysia?
A shareholder agreement is a contract between some or all of the shareholders of a company governing their relationship as shareholders.
Depending on how the arrangement is structured, the company itself may also be made a party to the agreement.
A shareholders agreement commonly deals with matters such as:
- the company’s shareholding structure;
- funding and capital requirements;
- appointment and removal of directors;
- management of the company;
- voting rights;
- reserved matters requiring special approval;
- dividend policies;
- issue of new shares;
- restrictions on transfer of shares;
- pre-emption rights;
- valuation of shares;
- protection of minority shareholders;
- deadlock situations;
- exit arrangements;
- confidentiality;
- dispute resolution; and
- termination of the agreement.
The objective is not simply to record who owns shares in the company. A good shareholder agreement establishes agreed rules for how the shareholders will exercise their rights and deal with important future events.
Why Have a Shareholder Agreement?
Business relationships can change over time.
Two founders may initially own a company equally and agree on every major decision. Later, one may want to expand aggressively while the other wants to preserve cash. Another business may have one shareholder providing most of the capital while another shareholder is responsible for operating the company.
An investor may also require particular rights before investing.
A written shareholder agreement allows these arrangements to be clearly documented.
1. Clear Decision-Making Procedures
The agreement can establish which matters may be decided by the board and which decisions require shareholder approval.
Routine business decisions can therefore be distinguished from major decisions that could substantially affect the company or the shareholders.
2. Protection of Shareholders
Majority and minority shareholders may have different concerns.
A majority shareholder may want sufficient control to operate the business effectively, while a minority shareholder may be concerned about decisions that could significantly affect the value of his or her investment.
A shareholder agreement can balance these interests by identifying important matters that require an agreed level of approval.
3. Clear Exit Arrangements
A shareholder may eventually wish to leave the business.
Without an agreed procedure, disagreements can arise over whether shares can be sold, who may purchase them and how those shares should be valued.
A shareholder agreement can establish these rules in advance.
4. Managing Future Disputes
Shareholder disputes can disrupt the operation of a company.
An agreement can establish procedures for dealing with disagreements, deadlocks and breaches before those situations occur.
Malaysian Law Governing Shareholder Agreements
A shareholder agreement in Malaysia does not operate independently of Malaysian company law.
Companies incorporated in Malaysia are principally governed by the Companies Act 2016.
The agreement should therefore be prepared with the statutory framework governing the company, its directors, shareholders and shares in mind.
The Contracts Act 1950 is also relevant because a shareholder agreement is contractual in nature.
Depending on the company and transaction, other legislation or regulatory requirements may also be relevant.
The contractual arrangements between shareholders should therefore be considered together with the Companies Act 2016 and the company’s constitution, where the company has one.
Is a Shareholder Agreement Compulsory in Malaysia?
A shareholder agreement is generally not simply a compulsory incorporation document that every Malaysian company must have.
However, the absence of a shareholder agreement does not mean that shareholders operate without rules.
Their rights and the company’s governance will instead depend upon the Companies Act 2016, the company’s constitution where applicable, resolutions that have been passed and other legally binding arrangements.
For companies involving several founders, investors, family members or joint-venture parties, a written shareholder agreement can be particularly useful because it allows the parties to establish additional commercial arrangements specifically suited to their relationship.
When Should a Shareholder Agreement Be Prepared?
Ideally, shareholders should consider preparing the agreement when their business relationship begins.
Common situations include:
- two or more founders establishing a company;
- an investor acquiring shares in an existing company;
- family members operating a family-owned business;
- two businesses forming a joint-venture company;
- a new shareholder joining the company;
- a significant change in company ownership;
- shareholders investing different amounts of capital; or
- existing shareholders wanting clearer governance and exit arrangements.
It is usually easier to agree on these matters while the shareholders’ relationship is good rather than after a serious disagreement has arisen.
Key Clauses in a Shareholder Agreement
The appropriate provisions depend on the company, the number of shareholders and their commercial arrangement.
Nevertheless, the following clauses are commonly considered when preparing a shareholders agreement in Malaysia.
1. Shareholding Structure
The agreement should identify the shareholders and their respective shareholdings.
For example:
Shareholder A – 50%
Shareholder B – 30%
Shareholder C – 20%
Where different classes of shares exist, the agreement should also be considered together with the rights attached to those shares.
2. Business and Purpose of the Company
The shareholders may wish to agree on the principal business activities and objectives of the company.
This can be particularly important in a joint venture where shareholders are investing for a particular project or commercial purpose.
3. Funding and Additional Capital
A company may require additional funding after incorporation.
The agreement can establish whether future funding will be provided through:
- additional share capital;
- shareholder loans;
- external financing; or
- another agreed funding mechanism.
It can also address what happens if one shareholder is unwilling or unable to contribute additional funds.
4. Appointment of Directors
Shareholders may negotiate rights to nominate or appoint directors to the board.
For example, a significant investor may require the right to nominate a director while it maintains a specified shareholding.
The agreement can also address:
- board composition;
- appointment and removal;
- chairman;
- frequency of meetings;
- quorum;
- voting; and
- appointment of key management personnel.
5. Management and Decision-Making
The shareholders should understand which matters are handled by directors and which matters require shareholder approval.
This becomes particularly important where shareholders have different levels of involvement in the company’s daily operations.
Reserved Matters and Shareholder Approval
One of the most important parts of a well-drafted shareholder agreement is the reserved matters provision.
Reserved matters are significant decisions that cannot be taken unless the required shareholders approve them.
Depending on the company, reserved matters may include:
- issuing new shares;
- changing the nature of the company’s business;
- acquiring or disposing of substantial assets;
- borrowing above an agreed limit;
- providing substantial guarantees;
- entering major contracts;
- changing directors or key management;
- declaring certain distributions;
- entering transactions with related parties;
- commencing significant litigation;
- amending important corporate arrangements; or
- selling the company’s business.
The required approval level should be carefully considered.
Requiring unanimous approval for every business decision can make the company difficult to operate. On the other hand, allowing every important decision to be determined by a simple majority may provide insufficient protection for minority investors.
The agreement should therefore distinguish ordinary business decisions from genuinely significant matters.
Dividend Policy
Shareholders frequently have different expectations concerning profits.
One shareholder may want profits distributed regularly while another may prefer to retain earnings for expansion.
A shareholders agreement can establish an agreed dividend policy or principles for considering distributions, subject to applicable law and the company’s financial circumstances.
The agreement should not assume that accounting profit automatically means that a particular dividend must be paid.
New Shares and Pre-Emption Rights
The issue of additional shares can affect an existing shareholder’s percentage ownership and voting position.
Pre-emption provisions can therefore be particularly important.
The Companies Act 2016 contains provisions concerning pre-emptive rights to new shares, subject to the company’s constitution and the applicable statutory requirements.
The shareholder agreement can also address how the shareholders intend future funding and share issues to be handled.
For example, if two shareholders each own 50% of the company and new shares are issued only to one shareholder, the ownership percentages may change substantially.
The agreement should therefore consider future capital requirements from the beginning.
Share Transfers and Right of First Refusal
Shareholders often do not want another shareholder to freely sell shares to an unknown third party.
A shareholder agreement may therefore restrict transfers and establish a procedure that must be followed before shares can be sold externally.
Depending on the agreed structure, the departing shareholder may first be required to offer the shares to:
- the existing shareholders;
- specified shareholders;
- the company where legally permissible and appropriately structured; or
- a third party only after the agreed internal process has been completed.
The agreement should also address the price and terms upon which shares are offered.
Where a new shareholder is permitted to acquire shares, the existing shareholders may require that person to enter into a deed of adherence so that the incoming shareholder agrees to be bound by the existing shareholder agreement.
Valuation of Shares
Share valuation can become a major source of disagreement when a shareholder leaves.
The agreement can establish how shares will be valued.
Possible approaches include:
- an agreed valuation formula;
- valuation based on financial performance;
- independent valuation;
- valuation by an accountant or professional valuer; or
- another mechanism agreed between the shareholders.
The appropriate method depends on the nature of the company and the circumstances in which the valuation is required.
The agreement may also distinguish between an ordinary voluntary exit and situations involving default or serious breach.
Protecting Minority Shareholders
A shareholder holding less than 50% of the voting shares may have limited ability to control decisions decided by ordinary majority voting.
A shareholder agreement can provide negotiated protections for minority shareholders.
These may include:
- reserved matters requiring enhanced approval;
- board representation;
- information and reporting rights;
- pre-emption rights;
- protection against dilution;
- controls over related-party transactions;
- restrictions on major asset disposals;
- tag-along rights; and
- agreed exit mechanisms.
The objective should not necessarily be to give a minority shareholder control over ordinary business operations.
Instead, the agreement can identify particular decisions that are sufficiently important to justify additional protection.
Tag-Along and Drag-Along Rights
Tag-along and drag-along rights are commonly considered when preparing shareholder exit provisions.
A tag-along provision can protect minority shareholders when a controlling or majority shareholder proposes to sell shares to a third-party purchaser.
A drag-along provision can, subject to its terms, enable qualifying shareholders to require other shareholders to participate in a sale so that a proposed purchaser can acquire the required ownership of the company.
The precise thresholds, procedures, notices and sale terms should be carefully drafted.
We explain these mechanisms separately in our detailed guide on Drag-Along and Tag-Along Rights in Malaysia.
Deadlock Between Shareholders
Deadlock is particularly important in a company owned 50:50.
If both shareholders must approve a decision and they cannot agree, the business may become unable to proceed with an important matter.
A shareholder agreement can establish a structured deadlock procedure.
Depending on the circumstances, this may involve:
Negotiation → Escalation → Mediation → Buy-Out or Other Exit Mechanism
The appropriate procedure depends on the nature of the company and the relationship between the shareholders.
A deadlock clause should be drafted carefully because an aggressive buy-out mechanism that appears workable when the agreement is signed can produce unexpected consequences later.