Shareholders Agreement: Everything You Need To Know

Shareholders Agreement: Everything You Need To Know

A Shareholders Agreement is the contract between the shareholders of the company to govern their manner and conduct, to define their rights, duties and obligations inter se in running the company. Every Shareholders Agreement should be individually tailored, because every company is different.

1. Why should you have a Shareholders Agreement?

   There are a number of benefits of having it:-

   • Reduce potential conflict- It allows the Shareholders to agree a range of matters relating to their involvement in the Company, so that they will know what will happen in certain circumstances, what can or cannot be done, how decisions are to be made and how disputes are to be resolved if and when they arise. As a result, it will reduce potential conflict between shareholders and help the Company to run smoothly and profitably.
   • Shareholder rights are protected- Having a Shareholders Agreement can provide further clarity and additional provisions on certain matters, both for minority shareholders (e.g. certain decisions requiring unanimous consent, as opposed to a majority decision) and majority shareholders (e.g. drag along provisions whereby majority shareholders can compel minority shareholders to sell their shares).
   • Information rights- Shareholders have limited information rights in respect of the Company’s financial status and account books. However, a Shareholders Agreement can provide for certain company information to be provided to shareholders, such as the Company’s financial status by means of appropriate letter notifications. This is useful for the shareholders to monitor their investment and track the progress of the Company.
   • Confidentiality- Shareholders Agreement is also a document for private viewing and can include a wide range of matters which the shareholders don’t want to be made publicly available such as dividends policy, shares valuation, restrictive covenants etc. Unlike the Constitution which needed to lodged with Companies Commission of Malaysia (“CCM”), there is no requirement to lodge a Shareholders Agreement at CCM, so the contents of the Shareholders Agreement can remain confidential.

2. When do you need a Shareholders Agreement?

   When a Company has more than one shareholder, or in joint ventures and investment situations, it is strongly advisable to have a Shareholders Agreement.

3. Is there a standard template for Shareholders Agreement?

   Yes and no. ‘Yes’, because you will be able to find templates online. ‘No’, because none of those templates have been prepared with your business, size of the company, shareholding structure etc in mind. Consequently, if you use a template, the document is unlikely to give you the rights and protections you might need or want, and may do quite the opposite.

4. Can Shareholders Agreement supersede the statutory requirement of Companies Act 2016?

   A Shareholders Agreement cannot supersede what is required by the statutory requirement. The Shareholders can agree in the Shareholders Agreement to do something more then what is required in the Companies Act 2016. So, if you breach the Shareholders Agreement, even though you didn’t breach the Companies Act 2016, the other party can sue you and claim for damages.

5. Does the Shareholders Agreement supersede Constitution?

   Shareholders may include a clause in the Shareholders Agreement which states 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.

6. When a new Shareholder join the Company, does the Shareholders Agreement automatically bind the new shareholder or a new Shareholders Agreement must be signed again?

   A Shareholders Agreement is a contract between the shareholders so a new Shareholder who is not part of the contract at the beginning will not be automatically bound by the Shareholders Agreement. But usually, the Shareholders Agreement will state that a new shareholder who wants to join the Company will need to enter into a deed of adherence with the Company and the existing shareholders to be bound by the terms and conditions in the Shareholders Agreement.

7. Is a Shareholders Agreement needed to be stamped for validity?

   A Shareholders Agreement is valid once it is signed by all the parties even if it is not stamped. But the Shareholders Agreement cannot be adduced as evidence in court unless and until it is stamped.

8. Where do I file/register my Shareholders Agreement?

   You do not need to file/register a Shareholders Agreement. A Shareholders Agreement is a contract between parties just like any other business contract and is used for internal purposes only.

9. What happens if I want to amend my Shareholders Agreement in the future?

   Typically, a Shareholders Agreement will include a clause which states that amendment is allowed if all shareholders consent to that amendment.

10. What are the common clauses in a Shareholders Agreement?

    1. Shareholders- details of the shareholders, current issued share capital, percentage of shareholding in each shareholder and also the manner of the Shareholders Meeting to be conducted. E.g., the quorum needed to hold a valid shareholder meeting, how shareholders should make decision etc.
    2. Directors- Manner of appointment, how many directors can a particular shareholder appoints to represent the shareholder in the board, rules and regulations relating to Director’s Meeting, e.g., quorum required for a valid meeting, decision making and whether affirmative vote of certain Directors must be obtained.
    3. Shareholders’ obligation- spell out each shareholders’ specific obligation and contribution to the Company such as the provision of technical expertise to the company.
    4. Restriction on shares transfer- Requirement for a shareholder to offer its shares to the other shareholders in the Company prior to its sale or the disposal of shares to a third party.
    5. Shares valuation- Provisions can be made for share valuations in the event that a Shareholder wishes to exit the business. This reduces the potential for conflict and any dispute.
    6. Dividend Policy- The manner in which the Company should declare its dividend. It is important that any dividend policy does not have a negative impact on the cash reserves of the business.
    7. Reserve matters- a set number of matters on which require a certain percentage or a unanimous approval from all shareholders/Directors in order to pass a resolution.
    8. Deadlock- Mechanism to govern the exit of shareholders in the event a dispute cannot be resolved. Only applicable where the company is owned on a 50/50 basis (or similar) and are used as a means to resolve usually fundamental disagreements between the shareholders.
    9. Dispute resolution- The mode of resolving disputes, whether it is court or arbitration. Usually, court is preferred unless parties prefer to litigate their matter in private by way of arbitration.
    10. Drag Along- Right of a majority shareholder to require/compel the other shareholders to sell its shares in the event the majority shareholder agrees to sell its shares in the company. This allows the potential buyer to acquire 100% of the company rather than only a majority interest in the company.
    11. Tag Along- Right of minority shareholder to tag along when a majority shareholder sells its shares to a third-party buyer. This enables the minority shareholder to sell on the same terms as the majority shareholder.
    12. Confidentiality- Obligation to keep information relating to the Company confidential.
    13. Transmission of Shares in the event of death of shareholder- a compulsory buy-out provision which provides that if a shareholder dies, the remaining shareholders, will first be offered to buy the deceased’s shares, and the executor or administrator of the estate would be required to sell the shares.
    14. Anti-dilution clause- Requiring any new shares to be offered to existing shareholders before they are offered to third party. This allows the shareholders with the opportunity to maintain their percentage ownership in the company.

Conclusion

Shareholders Agreement is used to safeguard the interests of all shareholders in the Company. Even if a Company did not start off with a Shareholders Agreement in place, there is nothing preventing the shareholders from entering into one subsequently. Without a Shareholders Agreement, it is more likely that a disagreement between the Shareholders would come about, particularly when things start to go wrong. So, having a Shareholders Agreement is the cheap way to minimize any potential disputes between the shareholders by making it clear how certain decisions are made by setting out a procedure to follow, the ways in which disputes may be addressed.