Shareholders Agreement

Q:  What are the differences between shareholders and directors?

A shareholder or member owns a company by holding its shares. A director manages the company. A director does not have to be a shareholder and a shareholder has no right to be a director.

Q:  What is paid-up capital?

Paid-up capital is the amount of funds or capital injected by the shareholders into the company for the shares allotted and issued to the shareholders.

Q:  Is there a minimum investment amount or share capital amount to form a company?

There is no minimum paid-up capital or investment amount requirement to form a company in Malaysia post the implementation of the New Act but practically speaking, RM1 should be the minimum paid-up capital to form a company. It is however important to note that most government agencies, banks, or other entities may require a certain minimum paid-up capital to be met by a company before they would consider any application for a loan, license, tender as well as any business dealings.

Subject however to the type of business or trade to be carried out and the licensing requirement for such business, there may be minimum paid-up capital requirement, for example, a company applying for Petronas license must have a minimum paid-up capital of RM100,000.

Q:  What is the minimum number of directors I should appoint to incorporate a private limited company?

The minimum number of directors required for incorporation of private limited company post implementation of the New Act is 1, unless otherwise provided in its Constitution.

Q:  Should I have a Shareholder Agreement? What are the key points to be included in a Shareholder Agreement?

Yes, it is strongly recommended to avoid many potential disputes that may lead to loss of a partner, friend or worse, huge costs for legal dispute.

The key points which should be included in a shareholder agreement are as follows:

1. The number of directors and the rights to appoint how many directors by each shareholder as well as the rights to remove directors.
2. Quorum for the board meetings and general meetings and whether affirmative vote or approval of certain (majority) shareholder or its appointed directors must be obtained before any decision in the respective general meeting and board meeting can be made.
3. Minority shareholders protection where unanimous shareholders’ approval is required for certain matters, for example, create, issue or redeem any share which will dilute minority shareholdings, or pass any resolution for winding up or make any proposal for voluntary arrangement of the company.
4. Restrictions on freedom to dispose of shares (pre-emption rights). No shares can be transferred unless they are first offered to other shareholders pro rata. Exceptions are usually made for transfers to a related company of the transferor such as its wholly owned subsidiary or holding company or to a trust for the benefit of that shareholder’s immediate family, and at what valuation the share transfer should take place.
5. Non-competition of business with the company and non-solicitation of customers or employees from the company while the shareholders remain as the company’s shareholders and for a period of time after they cease to be shareholders.
6. Funding of the company, whether by contribution by the shareholders on pro-rata basis or through external borrowings. The terms of the funding mechanism should be provided.
7. Dividend policy specifying a minimum or maximum percentage of the profits available for distribution in each financial year to be distributed.
8. How shareholder disputes should be resolved, by way of arbitration or otherwise.

Q:  Are there restriction to transfer shares in a private limited company?

Yes. A private company is required to restrict the transfer of its shares but such restriction on share transfer is not allowed for public companies. The directors in a private limited company have the discretion to refuse the transfer of shares. The New Act does not however provide the mechanisms for transfer of shares.

Shareholders’ agreements usually regulate the freedom to deal in shares of the company and have one of the following mechanisms (the features and sophistication of which may vary):

• Pre-emption rights whereby no shareholder in the company shall transfer or otherwise dispose of any or all of the shares in the company to any third party without having first offered its shares to the other shareholders on pro-rata basis. This is the basic structure, but its regulation and mechanism can be diverse.
• Russian roulette whereby a shareholder offers to sell all his shares to another shareholder at a price fixed by the offeror shareholder (frequently with certain limitations). The peculiarity is that the offeree shareholder must accept the offer and buy the shares of the offeror shareholder at the fixed price or must sell all his shares to the offeror shareholder at the same price per share.
• Transfer of shares to related companies whereby the above mechanisms do not apply to transfer of shares to related companies of the transferor namely its subsidiaries and holding company. In other words, consent is not required from the other shareholders either.

Notwithstanding the above, the board of directors’ approval is required for the transfer of shares.