Shareholders Agreement in Malaysia Lawyer’s Drafting Tips – Do shareholders in a Malaysian Company need a shareholders agreement?
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 shareholders to ensure that all rights of the parties are clearly spelt out to prevent any misunderstanding and ensure smooth running of the Company.
Does the shareholders agreement bind 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 deed of adherence or codifying such terms and conditions in the Constitution of the Company.
How does existing shareholders regulate the entry of new shareholder into the Company?
Existing shareholders may regulate the entry of new shareholder into the Company through restriction on shares transfer. The Malaysian Companies Act 2016 requires that a private company has a restriction on the transfer of its shares. This is one of the contrasting feature between a private company and public company whereby such shares of 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 right of first refusal in favor of the other existing shareholders or in the form of powers of the board of directors to refuse to register 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 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 following 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 shareholders.
Objective: The objective of the Company is agreed upon in the shareholders agreement and any change of business direction will typically requires passing of resolution by the shareholders.
Directors: Manner of appointment, manner for removal and quorum for board meeting should be specified.
Obligations of parties: The shareholders agreement should spell out the contribution of each shareholders to the Company such as the provision of managerial and technical expertise to the company, introduction of business and securing funding etc.
Financial – Manner in which the financial statements and accounts to be prepared and operation of bank accounts of the Company
Rights of First Refusal – Requirement for a shareholder to offer the other shareholders in the Company the right (but not an obligation) to acquire the shares prior to its sale or the disposal of shares to a third party.
Tag Along/Drag Along – Right of a shareholder to require any shareholder selling its shares to cause the buyer to purchase the shares of the former/ Right of a shareholder to require another shareholder to sell its shares on a 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.
Reserve matters for shareholders/directors: The matters that constitute reserve matters and the level of voting required by the shareholders/directors before such 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 for situation whereby a shareholder is unable to contribute pro rata in accordance with their shareholdings ratio should be provided for.
Deadlock: 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: 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 : Parties 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 shareholders agreement.
If you have doubts in drafting your shareholders agreement in Malaysia, feel free to contact one of our corporate lawyers. We advise start-ups, SMEs and corporation (especially in M&A transaction) in legal issues pertaining to shareholders agreement.