Under Malaysian law, dividends are not automatic. They are subject to legal conditions and, importantly, entirely discretionary unless otherwise agreed.
Beyond statutory requirements under the Companies Act 2016, business owners and investors can structure dividend arrangements through the company’s constitution or Shareholders’ Agreement (SHA).
Common SHA dividend policies
Below are common ways dividend terms can be tailored in an SHA, depending on the commercial context.
Restating legal requirements
While not strictly a customised term, it is common for SHAs to restate the statutory requirements to ensure clarity and awareness among all shareholders.
Cap and retention
The SHA may cap dividend distribution at a certain percentage – for example, 70% of post-tax profits, with the remaining retained for working capital or reinvestment.
Restriction in early years
Shareholders may agree that no dividends will be declared within the first few years of the company’s operations. This preserves cash for reinvestment and avoids the pressure to distribute profits before the business is financially stable.
Specific approvals
The SHA may require that dividends can only be declared with the approval of certain shareholders or founders, depending on the agreed reserved matters.
Distribution frequency
The SHA can specify how often dividends may be declared (i.e., annually, bi-annually, or quarterly), subject to profitability and statutory requirements. This is particularly common in joint-venture settings and startups where business partners and investors want clear expectations on when they can receive profit.
Accounting for loans and borrowings
Dividend declarations may be made conditional on the company meeting its financial obligations such as repaying shareholder advances or complying with loan covenants. This protects the company’s liquidity and ensures that those who have funded the business recover their capital before any profits are distributed.
Profit distribution formula
By default, dividends are distributed in proportion to shareholding, but parties may agree on a different formula such as prioritising returns to certain shareholders or classes of shares.
Benefits of customised dividend terms
The Companies Act does not deal with the finer details of how and when dividends should be declared, leaving it as a commercial decision that depends on the shareholder dynamics and the company’s stage of growth.
Customised terms are especially useful if the company needs to balance profit distribution with reinvestment, financing obligations, or founder and investor protections.
Conclusion
Most people set up companies or invest in them with the hope of sharing in future profits. As such, dividend expectations should not be left to assumptions and should be clearly documented in the SHA, the constitution, or both.
If you are looking to draft customised terms for your business, we can help translate your commercial intentions into clear and enforceable legal provisions.
