Shareholders’ agreements often raise practical questions that go beyond the usual topics covered in general guides. Some questions are specific to particular circumstances, while others concern legal or commercial nuances that may not be addressed in detail elsewhere.
In this article, the ELP team answers some of these questions, drawing on issues that arise in practice when drafting, reviewing or relying on shareholders’ agreements in Malaysia.
Where relevant, we have included links to our other articles for further reading.
Let’s begin.
Setting up a shareholders’ agreement
1. Is it safe to use a shareholders agreement template?
A template is a reasonable starting point, but it is rarely advisable to sign one unchanged. Common gaps:
- clauses copied from other countries that do not fit the Companies Act 2016
- reserved matters and thresholds that do not match your shareholding split
- no deadlock, exit or valuation mechanism
- terms that conflict with the company’s constitution
- unclear terms that create uncertainty during a dispute
A shareholders’ agreement prepared by a corporate lawyer is generally a more reliable starting point, as it can incorporate customary provisions on share transfers, exit arrangements and decision-making procedures, while taking into account the requirements of the Companies Act 2016. However, it should still be reviewed and tailored to reflect the company’s specific shareholding structure and the shareholders’ commercial intentions.
2. Does the company need a resolution to adopt a shareholders agreement?
Not by law, since a shareholders’ agreement is a private contract between its parties and does not require a company resolution merely to come into existence.
However, where the company is a party, it is good practice for the board to pass a resolution approving the company’s entry into the agreement and authorising its execution.
If the SHA requires amendments to the company’s constitution, shareholders must pass a special resolution (75%) to amend the constitution, which is then lodged with SSM. See our guide to shareholders agreements in Malaysia.
3. Is a shareholders agreement part of the company’s constitution, and is it filed with SSM?
No on both counts.
| Feature | Constitution | Shareholders agreement |
| Who is bound | The company and every shareholder automatically, under section 33 of the Companies Act 2016 | Only those who sign it |
| Public or private | Lodged with SSM, so anyone can purchase a copy | Private, not lodged |
| How it is amended | Special resolution (75%) | As the agreement itself provides, usually by all parties’ agreement |
Many companies keep commercial terms private in the agreement and mirror key protections in the constitution. See our guide to the shareholders agreement versus the company constitution.
4. Can only some of the shareholders sign a shareholders’ agreement?
Yes, if it is intended to govern only their respective contractual rights and obligations.
However, where the agreement deals with matters affecting the company’s overall governance, such as voting arrangements, reserved matters or share transfer restrictions, all shareholders should be parties to the agreement. This helps ensure that all shareholders are bound by the same contractual obligations and that the agreed arrangements can be implemented consistently.
Where the agreement contains provisions intended to bind the company or its members generally, the relevant provisions may also need to be reflected in the company’s constitution.
5. If the shareholders’ agreement and the company’s constitution contradict each other, which one prevails?
Check both documents for a precedence clause. If the precedence clauses consistently provide that the SHA prevails, then that is the case, and vice versa. However, it is best to ensure both documents align with each other at the drafting stage to avoid this trouble later.
If there is no precedence clause in both documents, or the precedence clause is only present in the SHA, by default the company constitution would prevail if there are contradictions or inconsistencies.
6. Can an LLP have a shareholders agreement?
Not as such. An LLP has partners, not shareholders, so the equivalent document is the LLP agreement under the Limited Liability Partnerships Act 2012.
It covers similar ground: capital contributions, profit sharing, management, admission and exit of partners, and disputes. If an LLP owns shares in a Sdn Bhd, the LLP itself can sign that company’s shareholders agreement. See our guide to LLP agreements in Malaysia.
7. Is a joint venture agreement the same as a shareholders agreement?
Often, but not always.
| Joint venture structure | Main document |
| Incorporated, through a new Sdn Bhd | A joint venture agreement that works as a shareholders agreement, provided it contains the necessary provisions governing the shareholders’ relationship, including shareholding, management, decision-making, share transfers and exit arrangements |
| Unincorporated, by contract only | A joint venture agreement, with no shares involved |
An incorporated joint venture agreement usually adds project-specific terms, such as each party’s contributions, intellectual property and the venture’s business scope. See our guide to joint venture agreements in Malaysia.
8. Can a shareholders’ agreement be signed before the company is incorporated?
Yes. The agreement may provide that provisions governing the shareholders’ rights and obligations as shareholders will only take effect once the company is incorporated and the relevant parties are registered as shareholders.
The agreement may also impose obligations on the parties before incorporation, such as requiring them to take the necessary steps to incorporate the company, subscribe for the agreed shares and complete the necessary filings with SSM.
9. Should I have a shareholders’ agreement ready before finding investors?
Not necessarily, particularly if the company is a startup or newly incorporated. At this stage, the priority is to gauge genuine investor interest and determine whether there is sufficient alignment to proceed with the fundraising.
Depending on the nature of the fundraising, the first document may be a non-disclosure agreement (NDA) to protect confidential information or a term sheet to record the key commercial terms of the proposed investment. The shareholders’ agreement can then be prepared once the investment structure and shareholders’ respective rights and obligations have been agreed.
See our article on the key stages of private fundraising in Malaysia.
Founders, investors and equity
10. What are founder shares, and how are they treated in a shareholders agreement?
Malaysian law has no special class called founder shares; they are usually ordinary shares issued to the founders when the company is set up. However, a company may create different classes of shares with different rights, including special voting rights, subject to the Companies Act 2016 and the company’s constitution.
Founders are treated the same as any other ordinary shareholders, unless the shareholders’ agreement provides founder-specific protections, such as:
- reserved matters requiring the founders’ consent
- veto rights over key decisions
- board representation for the founders
- quorum requirements ensuring founders’ participation in key meetings
See our guide to founder protection in shareholders agreements.
11. Can a shareholder receive shares in exchange for services instead of cash?
Yes. The Companies Act 2016 allows shares to be issued for consideration other than cash, and in the arrangement should be put in writing, including:
- the services and how their value is set
- when the shares vest, often as the work is delivered
- what happens if the services stop
See our guide to ESOPs versus share award letters.
12. Can shares be issued in stages as milestones are met?
Yes. Instead of issuing all shares upfront, the parties may agree for shares to be allotted in tranches as certain milestones are met, such as revenue targets, a product launch or completion of specified services.
The arrangement should be documented in writing, whether in a shareholders’ agreement or a separate share subscription agreement, setting out the milestones, the number of shares to be allotted at each stage, the consideration and the conditions for each allotment.
The company secretary will also need to work out and update the company’s capitalisation table (cap table) to reflect the shareholding structure following each tranche of allotment. See our guide to startup equity distribution in Malaysia.
13. What is a lock-in period in a shareholders agreement?
A lock-in period contractually restricts shareholders from transferring their shares for a specified period (i.e., 2-5 years), usually to provide stability in the company’s ownership structure and ensure that shareholders remain committed to the business. Common exceptions:
- transfers with the consent of founders or other shareholders
- transfers to specific permitted parties in the agreement, such as beneficial owners or associated companies
- transfers under a drag-along or tag-along
See our guide to share transfer restrictions.
14. What do investors usually ask for in a Malaysian shareholders agreement?
Investors in SMEs may seek certain rights and protections to safeguard their investment. These may include:
- anti-dilution protection
- a board seat and information rights
- a list of reserved matters needing their consent
- drag-along, tag-along and pre-emption rights
These are usually agreed first in a term sheet – see our guide to investment term sheets.
Decisions, reserved matters and the board
15. What are reserved matters in a shareholders’ agreement?
Reserved matters are important business decisions that cannot be made without the approval or consent of the shareholders specified in the shareholders’ agreement. These may include:
- declaring dividends;
- appointing or removing key personnel;
- approving the annual business plan or budget;
- entering into contracts exceeding a specified value;
- taking on significant borrowings; and
- selling or disposing of major company assets.
See our guide to reserved matters.
16. Do reserved matters need unanimous approval?
Only if the agreement says so. Reserved matters can require:
| Approval level | Effect |
| Unanimous | Every shareholder, or every director, has a veto |
| A set majority, such as 75% | Only shareholders holding more than the required threshold can approve the matter |
| A named shareholder’s consent | That shareholder can withhold consent and prevent the matter from proceeding. |
Unanimity is common in two-party joint ventures but may invite deadlock if the parties cannot agree, so it is important to have a deadlock mechanism in the agreement.
17. Do reserved matters need a special resolution, and can the agreement set a higher majority than the Companies Act?
A reserved matter only requires a special resolution where the Companies Act 2016 or the company’s constitution requires one.
For other matters, shareholders may agree in the SHA to impose higher approval thresholds, including 75% or unanimous consent. These contractual requirements bind the parties to the agreement.
If the intention is to have corresponding governance requirements apply at company level, the relevant provisions should also be incorporated into the company’s constitution. See our guide to shareholders agreements vs company constitutions.
18. Can a minority shareholder veto decisions of a majority shareholder?
Yes, if the shareholders agreement gives it a veto over reserved matters. For example, a 51% shareholder controls ordinary resolutions, but a minority with contractual veto rights can block listed matters such as new share issuances, large borrowing or a sale of the business.
Even without an agreement, a shareholder with more than 25% can block a special resolution under the Companies Act 2016. Veto rights should be balanced with a way out of deadlock. See our guide to deadlock provisions.
19. Can a shareholders agreement give a shareholder the right to appoint and remove directors?
Yes, a shareholders’ agreement may provide shareholders or a certain shareholder with the right to appoint and remove directors, subject to the requirements of the Companies Act 2016 and the company’s constitution. The agreement may also require the other shareholders to vote in favour of the appointment or removal of a director nominated by a particular shareholder.
Appointed directors must still comply with their statutory and fiduciary duties to the company, regardless of who nominated them. See our guide to nominee director agreements.
20. What should a shareholders agreement say about board meetings?
A shareholders’ agreement may set out additional arrangements for board meetings, particularly:
- whether a particular director must be present for the meeting to proceed, such as a director nominated by a particular shareholder.
- whether the chairperson has a casting vote where the directors are equally divided on a decision.
These arrangements help ensure that shareholders’ interests are represented in board-level decision-making while providing a mechanism to address potential deadlocks. See our guide to deadlock provisions.
21. Can a shareholders’ agreement include the shareholders’ operational roles?
Yes. This is common in a joint venture, where each shareholder may be expected to contribute to the business beyond providing capital. The shareholders’ agreement may set out each shareholder’s operational responsibilities and expected contributions.
However, if a shareholder is also employed by the company, the terms of their employment, including their duties, remuneration and termination, should be separately documented in an employment agreement.
See our article on employment contracts in Malaysia.
Share rights, transfers and funding
22. Can different classes of shares be created through a shareholders agreement?
Not by the agreement alone. A company can only issue different classes of shares if its constitution permits it. The shareholders’ agreement may impose a contractual obligation on the company and/or shareholders to procure the necessary amendments to the constitution to allow for the creation and issuance of the intended class of shares.
Once the constitution has been amended accordingly, the company may issue the relevant class of shares in accordance with the agreed commercial terms in the shareholders’ agreement. However, the rights attached to each class of shares, including voting rights, dividend entitlements and rights to return of capital, should be expressly set out in the constitution itself.
23. Should preference shareholders sign a shareholders’ agreement?
Not necessarily. A shareholders’ agreement is usually entered into by ordinary shareholders who are actively involved in the company’s management and decision-making. However, preference shareholders may also be parties to the agreement if it is intended to govern their rights and obligations.
For passive investors holding preference shares, their investment terms are commonly documented in a share subscription agreement, while the rights attached to their preference shares should be set out in the company’s constitution.
See our article on ordinary shares versus preference shares.
24. Can a shareholders agreement exclude shareholders’ statutory rights?
Only where the Companies Act 2016 allows it. For example, shareholders may agree to waive their statutory pre-emption rights in respect of a specific proposed allotment of shares. Any such waiver should be properly documented. See our guide to shareholder rights.
25. Should pre-emption rights go in the shareholders agreement or the constitution?
For pre-emption rights on new share issuances, section 85 of the Companies Act 2016 already provides statutory pre-emption rights to existing shareholders, unless the company’s constitution provides otherwise.
For pre-emption rights on transfers of existing shares, these are generally contractual. Ideally, they should be documented in both the shareholders’ agreement and the constitution. The shareholders’ agreement sets out the obligations between shareholders and contains the commercial details like pricing, timing and conditions, while including the restrictions in the constitution helps ensure that the company can enforce them when registering share transfers.
See our guide to shareholders’ pre-emption rights.
26. Can a shareholders agreement guarantee an investor will not lose money?
A company cannot guarantee an investor’s return on investment. It can only distribute returns to shareholders through lawful means, such as dividends, which are subject to the solvency requirements under the Companies Act 2016. This applies to both ordinary and preference shareholders.
However, shareholders may agree to contractual protections between themselves. For example, in a joint venture, the shareholders may agree to a put or call option if a shareholder fails to meet agreed performance obligations. This may require one shareholder to buy or sell their shares to the other, subject to the agreed terms.
See our guide to shareholder exits under the Companies Act.
27. What obligations and undertakings do shareholders usually give?
Shareholders may agree to various obligations to protect the company and their respective interests, including:
- contributing additional funds to the company, if agreed
- not competing or poaching staff and customers
- contribute certain pre-existing intellectual property for the business
- keeping company information confidential
- voting to give effect to the agreement
- not transferring or charging shares except as permitted
28. Should shareholder loans be covered in the shareholders agreement or a separate loan agreement?
Usually both. The SHA can provide for the possibility of shareholder advances as a financing method. The specific terms of each advance, such as the amount, interest, repayment and ranking, should be documented in a separate shareholder loan agreement.
29. Can a shareholders’ agreement require shareholders to provide personal guarantees or collateral?
Yes. Shareholders may agree to provide personal guarantees or collateral to support financing obtained by the company. The shareholders’ agreement can set out their respective obligations in this regard, including the extent of their contribution and how the obligations are to be shared among them.
30. What does a drag-along clause look like, and how does it work ?
A simplified drag-along clause might read:
If shareholders holding at least 75% of the Company’s shares agree to sell their shares to a third-party buyer, they may require the remaining shareholders to sell their shares to the same buyer on the same terms.
The drag-along notice should specify the buyer, purchase price, terms of sale and proposed completion date. Once the drag-along right is validly exercised, the remaining shareholders are required to participate in the sale, even if they do not wish to sell their shares.
See our guide to drag-along rights.
31. What does a tag-along clause look like, and how does the notice work?
A simplified tag-along clause might read:
If a shareholder proposes to sell shares that would result in the buyer holding more than 50% of the company’s issued shares, the seller must notify the other shareholders, who may within 14 days elect to sell their shares to the buyer on the same terms.
The notice should name the buyer and set out the price, terms and completion date. If a minority shareholder elects to tag, the sale cannot complete unless the buyer takes its shares too.
See our guide to tag-along rights.
Death, mistakes and ending the agreement
32. What happens to a shareholder’s shares when they die?
When a shareholder dies, their shares do not automatically pass to the other shareholders. Instead, the shares are transmitted to the deceased’s legal personal representative by operation of law.
What happens next depends on the agreement:
- the other shareholders may have an option to buy the shares at fair value
- the estate may be allowed to keep the shares or transfer them to family members
- an incoming beneficiary may have to sign a deed of adherence
The SHA should clearly address the treatment of shares upon death, including the valuation method and the procedure for exercising any purchase option.
33. Does a shareholder’s will override the shareholders agreement?
Not necessarily. A will does not automatically override the provisions of a shareholders’ agreement or the company’s constitution. A shareholders’ agreement typically provides that its terms continue to bind a deceased shareholder’s personal representatives, heirs and successors.
The deceased shareholder’s legal personal representative may be required to give effect to the SHA if it provides that the shares must be acquired by the surviving shareholders. Therefore, the beneficiary may receive the proceeds from the sale of the shares instead of retaining the shares themselves.
34. Can a mistake in a signed shareholders agreement be corrected?
Yes, in two main ways, depending on the nature of the error:
- a supplemental agreement or amendment signed by all parties, which is the simplest route
- the parties enter into a new SHA, signed by all parties, which expressly supersedes and replaces the existing signed agreement
See also our guide to updating the shareholders’ agreement.
35. What happens if a shareholder breaches the shareholders’ agreement?
The consequences depend on the nature of the breach and the terms of the shareholders’ agreement. Where the breach can be remedied, the non-defaulting party may require the defaulting shareholder to rectify it.
The agreement may also provide for specific consequences, such as requiring the defaulting shareholder to sell their shares to the other shareholders in certain circumstances. If the breach is not resolved, the affected party may take legal action to enforce the agreement or seek other appropriate remedies.
See our article on shareholders’ agreement exit clauses, which discusses compulsory transfer provisions arising from events of default, including breaches of the agreement.
36. How does a shareholders agreement end?
Usually through its termination clause, which may include the following common triggers:
- a shareholder stops holding any shares, which ends its rights but not obligations already incurred
- all parties agree in writing to terminate
- the company is listed or wound up
- one shareholder ends up owning all the shares
Without an applicable termination event, the SHA generally remains in force in accordance with its terms. Clauses on confidentiality and dispute resolution typically survive termination.
Let ELP tailor your SHA
The right corporate lawyer helps ensure your commercial intentions are properly captured and governed in the agreement. If you are selling a business, acquiring a company, or entering into a new shareholders arrangement, contact us for an initial consultation.
