Definition of Shareholders’ Agreements

A shareholders’ agreement is an agreement which, as is implied by its name, involves all or some of the shareholders in a company. It specifies the details about the relationship between the shareholders and the management of the company. Shareholders’ agreements are linked to ownership of shares as well as protection of shareholders. They also govern the way in which the company is run. In almost every company in Malaysia, the shareholders’ agreement is used in tandem with the company’s Articles of Association.

Why Shareholders’ Agreements Are Important

Shareholders’  agreements  are  often  used  as  a  safeguard  for  the  protection  of  shareholders  because  they  can serve  as  a  buffer  for  shareholders  during  times  of  misfortune.  They allow for losses caused by certain events to have a reduced effect. These events may include changes to the financing of the company, the management of the company, the company’s policy on dividends, the procedures to be followed during share transfers, and the company’s valuation of its shares.

The absence of a shareholders’ agreement will cause many disputes and disagreements between the company’s shareholders to occur. This  is  because  shareholders’  agreements  tend  to  contain  provisions  which  prevent  disagreements  from  taking  place. They also mention the most appropriate ways in which disputes may be addressed. Due to the fact that the company’s Articles of Association might not necessarily provide complete protection for shareholders, shareholders’ agreements are extremely important.

Details About Shareholders’ Agreements in Malaysia

Shareholders’ agreements in Malaysia are generally tailored to suit situations in which the shareholders of a company are separate from the board of directors and whose actions are typically not dictated by a single shareholder or group of shareholders. In such cases the directors who have the necessary expertise must be brought in by shareholders in order to manage the business affairs of the company on their behalf. Thus, even if the directors have shares in the company, they will most likely act in such a way that benefits the company instead of any single shareholder.

However, this does not apply to several small private limited companies in Malaysia. Such companies only usually have just a few shareholders. These shareholders typically serve as the directors of the company. In such situations, shareholders’ agreements are helpful because all shareholders of the company must ensure that their rights have been adequately protected, especially if the company’s Articles of Association does not state any details about protection of shareholders’ rights.

Many shareholders’ agreements in Malaysia are created with provisions that protect the minority shareholders of the company or those with equal shareholdings. Minority shareholders are those who cumulatively hold less than half of the value of the company’s shares, while shareholders with equal shareholdings are those who cumulatively hold exactly half of the value of the company’s shares.

Minority shareholders in a Malaysian private limited company are often vulnerable to exploitation. Such is often the case because private limited companies tend to have a low number of shareholders. Furthermore, it is often difficult to sell the shares of a private limited company; therefore, many minority shareholders who are dissatisfied with how the company is being run often find it very difficult to sell those shares. When one or two shareholders hold many of the company’s shares, abuses of power may result even if no single shareholder holds a majority of the shares.

Shareholders’ agreements are not only designed for minority shareholders of any company. Shareholders’ agreements may also drafted with the rights of the majority shareholders in mind. Majority shareholders of a company might have plans to restrict the powers of directors if the shareholders do not have a level of representation at board level deemed to be sufficient or if the shareholders are not given an active role in the running of the business.

Majority shareholders of a Malaysian company might also not want to include any minority protection provisions. They might instead prefer to ensure that if a buyer for the company is found at any time, all the shares of the company could be sold at any time, regardless of whether the shares had been held by majority or minority shareholders. Majority shareholders might also consider appropriate non-competition and confidentiality covenants and provisions requiring financial input from other shareholders.

Why Shareholders’ Agreements Are Necessary

A shareholders’ agreement is an agreement between the shareholders of a company which contains information about the rights, obligations, and privileges granted to the company’s shareholders. It also explains how the company is expected to be set up and managed. Shareholders’ agreements often minimize the impact of any issues which may affect companies by clarifying how certain matters will be handled as well as by providing an avenue for the resolution of any future disputes.

Decision-Making

Unless otherwise stated in a shareholders’ agreement, most decisions made by a company can usually be made through the approval of either a simple majority or a supermajority of shareholders. Such  decisions  often  have direct impacts  upon  the  operations  of  the  company  itself.  A shareholders’ agreement is therefore necessary because it allows the shareholders to decide upon how much shareholder approval is required before any decisions could be made.

Restrictions on Transfers and Ownership of Shares

Restrictions on who is allowed to become a shareholder is an important element of any shareholders’ agreement. This is because it is important for all shareholders to be able to work together for the benefit of the business. Most companies in Malaysia require the approval of the directors before any shares may be transferred. However, depending on the decision of the board of directors, this may not always be beneficial because it may cause harm to the minority shareholders of the company.

Financing

A shareholders’ agreement often explains how the corporation will generate and access funds as well as the shareholders’ responsibilities to contribute towards such funds.

Exit Strategies

A shareholders’ agreement will provide for different exit strategies should the shareholders of the company become unable to conduct business activities together. During the creation of the shareholders’ agreement, shareholders should consider what should take place if they end their association with the company, whether voluntarily or involuntarily.

Consequences Inflicted on a Malaysian Company Without a Shareholders’ Agreement

In Malaysia, corporate laws as well as a company’s Articles of Association provide strict compliance rules which are to be followed by shareholders. Some of these rules relate to shareholders’ agreements. According to the regulations which currently exist in Malaysia, shareholders’ agreements are expected to contain information including the rights and obligations of the company’s shareholders, the methods by which the company is to be run, the details concerning the appointment of employees as well as any entry into important financial agreements, the methods by which disputes and conflicts of interest are to be resolved, the procedures of the selling of existing shares and the issuing of new shares, and how the rights of minority shareholders are to be protected.

Keeping  these  facts  in  mind  as  well  as  the  fact  that  a  shareholders’  agreement  establishes  a  relationship  between  shareholders,  companies  in  Malaysia  which  do  not  have  one  expose  both  shareholders  and  the  company  alike  to  potential  troubles  in  the  future,  especially  in  the  case  of  private  limited  companies  which  are  small  or  medium-sized  enterprises (SMEs).  Such companies are particularly vulnerable to problems brought on by a lack of a shareholders’ agreement because the relatively few shareholders may begin to jostle for control of the company and ultimately harm the success of the company by doing so.