For Malaysian SMEs, the Shareholders’ Agreement (SHA) sets out how shareholders may exit and ensures that clear exit mechanisms are in place when it happens.
Of course, company owners leave for many reasons and so below are seven SHA exit clauses that account for the most common.
7 SHA exit clauses
| Exit Clause | How It Works |
| Share Transfer | Sets out the procedures for a shareholder to sell or transfer shares and may include restrictions or approvals before a sale can take place |
| Pre-emptive rights | Gives existing shareholders the first opportunity to purchase shares before they can be sold to an external buyer, allowing them to maintain control over who becomes a shareholder in the company |
| Tag-Along Rights | Allows minority shareholders to sell their shares if a majority shareholder sells their stake to a third-party buyer |
| Drag-Along Rights | Allows majority shareholders to require minority shareholders to sell their shares to a buyer as part of a company sale |
| Put Option | Gives a shareholder the right to require another shareholder or the company to purchase their shares under certain agreed circumstances |
| Deadlock Exit Mechanism | Provides a process for resolving situations where shareholders cannot agree on key decisions, a shareholder may buy out the other if the deadlock cannot be resolved |
| Event of Default | Requires a shareholder to transfer or sell their shares (often at a discounted value) if specific events occur such as breaches of the SHA, conviction of an offence, or insolvency |
Different exit mechanisms may benefit majority shareholders, minority shareholders, or both. A SHA will usually have a combination of these clauses depending on the relationship between the shareholders, and engaging a corporate lawyer well-versed in drafting SHAs ensures these clauses properly reflect the parties’ commercial interests.
If the exit clause is outdated / absent
If the exit clause in the SHA is outdated or does not accurately reflect shareholders’ intentions it can lead to disputes or difficulty in exiting the company. For instance, minority shareholders may find it hard to leave the company on its terms if there is no protection mechanism (i.e., tag-along rights) for them.
If there is no SHA at all, exit mechanisms become unclear, and the commercial and governance risks are potentially greater.
Shareholders and founders should review and update their SHA from time to time to ensure the agreement continues to reflect the company’s evolving commercial arrangements.
Let ELP draft your Shareholders’ Agreement
If you have an existing SHA that requires review, or are considering putting one in place, we specialise in structuring Shareholders’ Agreements that ensure smooth exit mechanisms along with other clauses. Contact us for a free consultation.
