# Shareholders Agreement in Malaysia – Lawyer’s Drafting Tips > Drafting a shareholders agreement in Malaysia? Key clauses, share transfer restrictions and constitution conflicts explained by corporate lawyers. Canonical URL: https://www.cecolaw.com/shareholders-agreement-in-malaysia-lawyers/ Published: 2020-06-03 Updated: 2020-06-08 Author: Cecilia Lim (Associate), Ching, Elaine & Co — Advocates & Solicitors, Malaysia Reviewed by: Lim Ching Yong (Partner) --- ## Do shareholders in a Malaysian company need a shareholders agreement? A shareholders agreement in Malaysia is not a mandatory requirement. The Malaysian Companies Act 2016 also does not require a private company to have a constitution. Nonetheless, it is strongly advisable to have a shareholders’ agreement if you have more than one shareholder, to ensure that all rights of the parties are clearly spelt out to prevent any misunderstanding and ensure the smooth running of the Company. ## Does the shareholders agreement bind a new shareholder? No. However, the shareholders agreement may specifically impose an obligation on all existing shareholders to ensure that new shareholders are bound by the terms and conditions in the shareholders agreement, either by way of a deed of adherence or by codifying such terms and conditions in the Constitution of the Company. ## How do existing shareholders regulate the entry of a new shareholder into the Company? Existing shareholders may regulate the entry of a new shareholder into the Company through restrictions on the transfer of shares. The Malaysian Companies Act 2016 requires that a private company have a restriction on the transfer of its shares. This is one of the contrasting features between a private company and a public company, whereby the shares of a public company are freely transferable. However, the Companies Act 2016 does not specify the mode of restriction or the extent of the restriction required. Such restrictions are commonly in the form of a right of first refusal in favour of the other existing shareholders, or in the form of powers of the board of directors to refuse to register a transfer of shares. ## Does the shareholders agreement supersede the Constitution? Shareholders may agree that the shareholders agreement will supersede the Constitution to the extent of any conflict. However, such a shareholders agreement is not binding upon the Company unless the Company is made a party thereto. ## What are the common clauses in a shareholders agreement in Malaysia? Your lawyers will generally include the clauses below in your shareholders agreement. Please note that whilst these are standard clauses, your lawyer drafting the shareholders agreement may tweak such clauses depending on whether you are a majority or minority shareholder. ### Objective The objective of the Company is agreed upon in the shareholders agreement, and any change of business direction will typically require the passing of a resolution by the shareholders. ### Directors The manner of appointment, the manner of removal and the quorum for board meetings should be specified. ### Obligations of parties The shareholders agreement should spell out the contribution of each shareholder to the Company, such as the provision of managerial and technical expertise to the Company, the introduction of business and the securing of funding. ### Financial The manner in which the financial statements and accounts are to be prepared, and the operation of the bank accounts of the Company. ### Rights of First Refusal A requirement for a shareholder to offer the other shareholders in the Company the right (but not an obligation) to acquire the shares prior to their sale or the disposal of the shares to a third party. ### Tag Along/Drag Along *Tag along*: the right of a shareholder to require any shareholder selling its shares to cause the buyer to purchase the shares of the former. *Drag along*: the right of a shareholder to require another shareholder to sell its shares on the same terms and conditions to another buyer. ### Dividend Policy The manner in which the Company should declare its dividend. This is always subject to the solvency requirements under the Malaysian Companies Act 2016. ### Management The shareholders agreement will specify the manner in which the Company should be operated, whether through a business plan agreed upon or otherwise. ### Reserved matters for shareholders/directors The matters that constitute reserved matters, and the level of voting required by the shareholders/directors before such a resolution is considered passed. ### Funding The preferred mode of funding would usually be stated – equity funding or debt funding. For equity funding, a clause to cover the situation whereby a shareholder is unable to contribute pro rata in accordance with its shareholding ratio should be provided for. ### Deadlock A mechanism to govern the exit of shareholders in the event a matter in dispute cannot be resolved. Consult your lawyer for the best mechanism that suits your needs. ### Confidentiality The obligation to keep information relating to the Company confidential. ### Dispute resolution The preferred mode of resolving disputes – whether it is court or arbitration. Typically, court is preferred, for it is cheaper, unless parties prefer to litigate their matter in private, whereby they can opt for arbitration. ### Governing law and jurisdiction The parties are to decide the law to be used when interpreting the shareholders agreement. There are no laws which govern the manner in which the shareholders agreement is supposed to be drafted. However, parties should be mindful of certain provisions in the Malaysian Companies Act which cannot be overridden by such a shareholders agreement. Our [corporate practice](https://www.cecolaw.com/#practice) advises start-ups, SMEs and corporations, especially in M&A transactions, on legal issues pertaining to shareholders agreements. ## Further reading - [Due diligence in mergers and acquisitions in Malaysia](https://www.cecolaw.com/due-diligence-lawyer-malaysia/) - [Scheme of arrangement, judicial management and corporate voluntary arrangement compared](https://www.cecolaw.com/scheme-of-arrangement-judicial-management-cva-malaysia/) - [The law of undue preference in Malaysia](https://www.cecolaw.com/the-law-of-undue-preference-in-malaysia/) --- This commentary is general in nature and is not legal advice. Ching, Elaine & Co, a boutique corporate law firm in Malaysia — https://www.cecolaw.com/ · info@cecolaw.com · +60 3-7664 2141