In the world of business, where trust and confidence are key to business success and nurturing long-term relationship, understanding the vital role of a Shareholders’ Agreement in Malaysia is crucial. So, what is a Shareholders’ Agreement?
A Shareholders’ Agreement sets out a contractual framework that governs the relationship of the company’s shareholders, establishing guidelines for their behaviour and interactions within the company. It outlines the rights, duties, and obligations of the shareholders. It is imperative to customise each Shareholders’ Agreement, considering the unique characteristics of each company, as no two companies are identical in their structure and operations.
Why Is Having a Shareholders’ Agreement Important?
Here are seven reasons why having a shareholders’ agreement is important:
- Protection of Shareholder Rights
A shareholders’ agreement protects the rights and interests of shareholders by clearly defining the rights, duties, and obligations of each shareholder, ensuring that everyone knows what is expected of them. This clarity helps prevent misunderstandings and conflicts between shareholders while ensuring everyone is aligned from the outset. The agreement also mandates that shareholders use their voting power in the company to ensure that the terms of the agreement are complied with for as long as they are shareholders. This commitment fosters effective collaboration between the company and its shareholders.
- Ensuring Corporate Governance
Effective corporate governance hinges on a well-structured shareholders’ agreement that guides the company towards long-term success. A shareholders’ agreement serves as a blueprint for the company’s operations, fostering transparency, fairness, and accountability. Key aspects such as decision-making processes and voting rights are clearly defined, establishing a solid framework for managing the company and fostering a robust relationship between the company and its shareholders.
- Promoting Certainty and Stability
A shareholders’ agreement provides certainty on various crucial matters that impact shareholders’ interests in the company, such as management structure, exit strategies, events like death or disability, valuation methods, dividend policies, and non-competition covenants. By establishing these guidelines upfront, the agreement helps to prevent and resolve issues before they escalate, minimising the risk of future disagreements. This provides shareholders with greater protection in case their relationship turns sour, thereby promoting stability within the company. Moreover, the agreement includes mechanisms for resolving deadlocks and disputes among shareholders. This helps to avoid corporate paralysis or costly legal battles that could disrupt business operations and governance.
- Securing Information Rights
While shareholders typically have limited information rights, a shareholders’ agreement can enhance transparency by stipulating the provision of specific company information to shareholders. This may include regular updates on the company’s financial, operational, and performance metrics, empowering shareholders to monitor their investments and track the company’s progress over time.
- Safeguarding Confidentiality
A shareholders’ agreement is a private and confidential document that can include matters which shareholders prefer to keep private. Unlike a constitution (which is required to be lodged with the Companies Commission of Malaysia), a shareholders’ agreement does not need to be publicly disclosed. This confidentiality allows commercially or financially sensitive details, such as dividend policies, share valuation methods, and restrictive covenants, to remain confidential.
- Supplementing Statutory Protections
Adopting a shareholders’ agreement can complement the statutory rights and protections provided by the Companies Act 2016 (“Act”). The Act may not fully address or might overlook certain aspects of shareholder protection. A customised shareholders’ agreement allows shareholders to address issues related to their involvement in the company, establishing additional rules and protections tailored to their unique circumstances and priorities. In doing so, it fills the gaps left by the Act or the company’s constitution, thereby enhancing overall shareholder protection.
- Attracting New Investors
Having a shareholders’ agreement in place may create a positive impression for potential investors, financiers, and business partners by demonstrating the company’s stability and foresight. It signifies that the company operates with structured rules and has established mechanisms to address internal affairs and shareholder disputes effectively. This minimises conflicts and risks, illustrating a well-organised and robust business environment.
How to Write a Shareholders’ Agreement?
Writing a Shareholders’ Agreement is a crucial step in establishing clear guidelines and terms for shareholders in a company.
The following are examples of typical clauses commonly found in a shareholders’ agreement:
- Governance and Decision-Making: Outlines how decisions are made, including voting rights, board representation, and procedures for board and shareholder meetings. This ensures a fair and transparent process for making important decisions that affect the company and its shareholders.
- Rights to Appoint Directors: Specifies which shareholders have the authority to appoint directors to the board of directors.
- Shareholders’ Rights and Obligations: Describes the contributions each shareholder is obligated to make to the company, their obligations, and their entitlements to voting rights and dividends.
- Pre-emption Rights: Ensures that each shareholder must offer existing shareholders the opportunity to purchase shares before selling them to third parties.
- Reserved Matters: Outlines reserved matters and the required voting thresholds for decision-making. Learn about what are reserved matters and the significant impacts of reserved matters in shareholders’ agreements here.
- Deadlock Resolution: Defines what deadlocks are and how they will be resolved. This could involve methods like ‘Russian Roulette’, ‘Texas Shoot Out’, put and call option, or other agreed-upon methods.
- Dispute Resolution: Outlines the preferred method for resolving disputes, such as mediation, arbitration, or legal proceedings.
- Default: Specifies what constitutes an event of default that would automatically trigger the requirement for a shareholder to transfer their shares to either the other shareholders or a third party, at a pre-agreed price or valuation method.
- Financing: Details the chosen funding method for the company’s operations.
- Confidentiality: Mandates that all shareholders maintain confidentiality regarding the company’s confidential information.
Conclusion
Every company with more than one shareholder is advised to have one shareholders’ agreement in place. A well-crafted shareholders’ agreement provides benefits such as fostering transparency, eliminating disagreements, and promoting harmonious collaboration among stakeholders, all of which contribute to the long-term success and sustainability of a business. Keep in mind that each shareholders’ agreement should be customised to fit the specific shareholding arrangement and the unique circumstances of the company. Given that the purpose of a shareholders’ agreement is to regulate relationships, and recognising that every business and shareholder relationship is unique, it is essential for the terms of the shareholders’ agreement to be carefully thought out and meticulously crafted.
