In practice, many if not most Malaysian SMEs operate without a Shareholders’ Agreement (SHA), relying on trust, informal discussions, or assumptions that the Companies Act 2016 is sufficient.
While this can work, a venture without an SHA is always a dispute away from an unresolvable deadlock and below are nine risks of running a company without one, especially in founder-led, family-owned, and joint venture businesses.
Lack of clarity on roles
Some shareholders assume that everyone is actively involved in running the company while others see themselves as passive investors. When one feels they are doing more work than others, disagreements can arise over involvement, remuneration and fairness.
An SHA can clarify whether shareholders are expected to be involved in the business and what happens if they are not.
Dividend policy disagreements
When a company becomes profitable, some shareholders may want dividends to be paid out, while others prefer profits to be retained for growth or working capital.
As the declaration of dividends is a matter for the board of director, where directors and shareholders are not the same people, this can lead to misalignment.
An SHA allows a company to customise dividend terms so expectations are aligned from the outset.
Unclear financial authority
Banking arrangements are often set up quickly at the start of a business. Over time, questions arise over who can operate bank accounts, approve payments or commit the company to loans and financing.
An SHA can formalise bank mandates, approval limits and signing requirements, helping shareholders stay aligned on financial control.
Shareholder disputes
Disagreements between shareholders are not unusual, especially as the business grows or when there is a change in control or circumstances. When there is no agreed process for dealing with disputes, disagreements can escalate. Resolving matters becomes time-consuming, costly and disruptive to the business.
An SHA can set out a structured dispute resolution process allowing issues to be addressed early and in a controlled manner and is one of the most important parts of SHAs for family-run businesses.
Uncertain exit mechanisms
At some point, a shareholder may want to sell their shares or exit the company. Without clear rules, uncertainty arises over who the shares can be sold to, how the price is determined and whether the remaining shareholders have any say in the process.
An SHA typically sets out exit mechanisms such as pre-emptive, tag-along, and drag-along rights, providing clarity on how share transfers and exits are handled.
No say in major decisions
Business decisions are often made at board or shareholder level, and where shareholding is uneven, majority shareholders can pass resolutions without minority support, leaving the latter with little influence over key matters that affect their investment.
An SHA can protect minority shareholders by specifying topics that require unanimous consent or special approval.
Uncertainty on capital contributions
As a business grows, it may require additional funding to support operations, expansion or unexpected expenses. Without clear guidelines, disagreements can occur when some shareholders are willing to inject funds while others are not. This is particularly common in startups and growing SMEs.
An SHA can set out how additional funding is to be handled, including whether contributions are mandatory, optional or structured as loans, reducing uncertainty when the business needs capital.
No protection over data / expertise
There are no default legal obligations requiring shareholders to protect the company’s confidential information after they leave. This includes customer lists, pricing, suppliers, business strategies, intellectual property and internal processes.
An SHA can contractually require shareholders to keep such information confidential and restrict shareholders from engaging in competing businesses.
Deadlock in 50:50 shareholding
In companies with equal shareholding, disagreements between shareholders can result in deadlock. When both sides have the same voting power, key decisions cannot be made if there is no agreement.
An SHA can include deadlock resolution mechanisms, such as escalation procedures or agreed exit options, to help the company move forward when shareholders cannot agree.
Let ELP tailor your Shareholders’ Agreement
We regularly draft and advise clients on SHA matters, including reviewing existing arrangements and preparing agreements that reflect the shareholders’ commercial understanding.
If you would like to discuss putting a shareholders’ agreement in place or reviewing an existing one, we welcome you to get in touch for a free consultation.
