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.