Unlike public companies where shares can be traded freely, private companies in Malaysia rely on restrictions over share transfers to maintain control, and once a transfer happens without safeguards, those rights may be lost for good.
For founders, investors, and shareholders, understanding how share sale restrictions are outlined in the Companies Act (CA) 2016 is key to ensuring critical protections are in place before issues arise.
Restrictions under the CA 2016
Section 42 of the Companies Act 2016 makes it a legal requirement for every Sdn. Bhd. to include restrictions on share transfers.
Though the Act doesn’t specify how these restrictions should be implemented, they are commonly included in two key governing instruments:
It is usually the SHA that contains practical details such as who can sell, to whom, and under what conditions. As the SHA is a private contract between shareholders, it allows greater flexibility in crafting commercial rules agreed upon amongst them.
4 common examples of restrictions
Most private companies adopt a combination of restrictions to control how shares are transferred and below are four of the most commonly found.
1. Pre-emption rights
Also referred to as rights of first refusal, this right gives existing shareholders the first opportunity to purchase any shares being offered for sale, usually in proportion to their current holdings.
Interestingly, while pre-emption rights on share transfers must be expressly spelled out in the SHA or constitution to be enforceable, the Companies Act 2016 provides a statutory pre-emption right for new share issuances, giving existing shareholders priority to subscribe to new shares before they’re offered to outsiders.
2. Board or shareholder consent
A company may require any proposed share transfer to be approved by the board, certain shareholders, or a founder. This can require the selling shareholder to disclose a prospective third-party buyer’s identity and background, giving existing shareholders a chance to assess potential risks.
This helps maintain control over who joins the company’s shareholder pool. You don’t want to find out your “new shareholder” is your competitor!
3. Moratorium on transfers
A moratorium prevents shareholders from transferring their shares for a defined period, often during the early stage of the company or shortly after a funding round.
The purpose is to stabilise ownership, retain key stakeholders, and avoid premature exits, especially where founders want time to exercise pre-emption rights or buy out interests.
4. Tag-along and drag-along rights
We cover both in our tag- and drag-along rights guide, but to put it briefly:
- tag-along rights protect minority shareholders by allowing them to “tag along” the sale if a majority shareholder sells their majority stake to a third party who will become the new majority shareholder
- drag-along rights protect majority shareholders by allowing them to compel minority shareholders to sell their shares in a scenario that requires a full company sale
These mechanisms can be customised to fit your company’s commercial realities, and the key is ensuring clarity and clear drafting that reduce the risk of disputes during exits.
Defences against shareholder breaches
When a shareholder bypasses agreed procedures written down in agreements, boards typically have several available defences.
Board refusal to register transferred shares
Under Section 106 of the Companies Act 2016, the board may only refuse registration if such power is expressly provided in the constitution, and the Companies Act 2016 by default only allows statutory refusal if shares have not been fully paid up.
In all other cases, without express provisions in the constitution or SHA, the director will have to register the transfer within 30 days after serving the share transfer form to the company even if unapproved by other shareholders.
Remedies under the Shareholders’ Agreement
If there is an existing SHA or company constitution in place, minority shareholders may enforce it in court to declare a non-compliant share transfer null and void.
Below, we share two recent court cases involving non-compliance with pre-emption clauses.
LGB Engineering Sdn Bhd & Ors v. Rayston Resources Sdn Bhd (2022)
Focus: Violation of company constitution / Articles of Association
In this case, a dispute arose when the majority shareholder of a private company transferred one share to its related entity without adhering to the pre-emptive rights in the company’s Articles of Association (AOA), which required shares to be offered to the minority shareholder first.
The minority shareholder challenged the transfer in court and succeeded. The court held that the pre-emption right is “one of the hallmarks of a private limited company.” Breaching it constituted a contractual violation of the AOA, and the share transfer was declared null and void.
Since the transferee was not a valid shareholder, quorum was not properly constituted at subsequent meetings, rendering all resolutions passed at those meetings invalid. The Court of Appeal later found that while the breach was curable, it could be ratified through written resolutions.
WHL Creations Sdn Bhd v. Asia Metro Marketing Sdn Bhd (2024)
Focus: Violation of Shareholders’ Agreement (SHA)
In this case, the court allowed a counterclaim by granting a declaration that the transfer of shares from the plaintiff, P2, to his wife was void pursuant to Clause 9.2 of the SHA. The transfer did not comply with the pre-emption requirements set out in Clause 9.2.
The court ordered that the shares be re-transferred back to P2, enforcing the terms of the SHA and maintaining the integrity of the shareholder agreement.
These cases illustrate that Malaysian courts will enforce the terms of both the company’s constitution and SHA and may invalidate unauthorised transfers.
Courts generally place significant weight on the clarity of contractual language when resolving such disputes, making it essential that both documents are carefully drafted to avoid ambiguity and enforcement issues.
What if you don’t include restrictions?
In a private company, the absence of written restrictions means shareholders (especially those with board control) may be free to transfer their shares with little oversight, including to third parties or even competitors.
Once that transfer happens, unwinding it can be difficult if without a contractual or constitutional basis to rely on as:
- the board may not have the authority to refuse the registration
- other shareholders may lose the chance to buy those shares first
- the courts won’t imply protections that are not clearly written, or
- legal remedies may simply not be available
In that sense, an SHA without these protections is like a body missing a limb; technically alive but missing something essential.
That’s why most well-drafted SHAs include these terms as standard, and the real risk arises when a company has no SHA at all, or when the constitution is vague.
Conclusion
We regularly advise founders, shareholders, and investors on how to manage these issues with foresight and without overcomplicating things.
Whether you’re drafting a new Shareholders’ Agreement or looking to review an existing one, we can help ensure that key protections like share sale restrictions are properly structured and enforceable, ensuring the protections suit your company’s structure and commercial goals.
