Common Clauses In a Shareholders Agreement

Here are five clauses commonly found in SHAs that may be useful in protecting your interests as a shareholder:

1. Shareholders' Obligations

Typically, this is where parties establish the general etiquette of being business partners. For example, you may find a clause that states "Shareholders must act in the best interest of the Company."

However, if each shareholder is bringing something unique to the table, this clause can help spell out the specific obligations of each shareholder – e.g. Abu has an obligation to invest RM1,000,000.00 into the Company; Nick has the knowledge and the network to obtain the necessary licences from the local government and regulatory agencies; and Salmah has decades of management experience to oversee and implement the various projects of the Company.

2. Reserved Matters

There are a set number of "Reserved Matters" on which the company must reach a unanimity vote. This provision is particularly significant for minority owners, as it provides protections against the rights of dominant shareholders (who will most likely be able to outvote everyone else at meetings of the Company).

Common examples of Reserved Matters include a change in the Company's business, an increase in the Company's share capital (which would dilute everyone's shareholding), the exercise of borrowing powers (such as taking out a large bank loan), and the creation of encumbrances (such as registering a charge against the Company's assets).

3. Directors Appointment

Commonly, companies have an uneven number of directors to avert situations of deadlock. It is also customary for a majority shareholder to appoint more directors than a minority shareholder in order to retain executive control of the company.

However, shareholders should also insist on the right to appoint at least one director of the company. Even if you do not have executive control over the company, having a representative on the Board of Directors would allow you to easily monitor its operations and protect your rights as a minority shareholder.

4. Share Transfers

A responsible shareholder must ensure that arrangements are made in the event that another shareholder wishes to withdraw from the company. In the absence of opposing provisions, you can find yourself in business with a competitor who acquired your business partner's shares! It is feasible to stipulate this in the shareholders' agreement if it is important to the parties.

The purchase price of the departing shareholders' shares is a further essential provision. Unless the shareholder is ready to sell the shares at the price they first paid for them (which is unlikely in many cases), it may be required to have some form of valuation mechanism.

Consider, however, that valuing a company may not be cost-effective. Even if the company they are assessing is not worth that much, prominent auditing firms in Kuala Lumpur might charge up to six figures.

In addition, there are terms such as first offer rights, first rejection rights, drag-along rights, and tag-along rights. However, these may not be necessary (indeed, they may be rather onerous) for SMEs.

5. Dispute Resolution

A dispute resolution clause may allow shareholders to choose how to resolve disagreements among themselves. For example, the shareholders' agreement may have an arbitration clause, requiring all disagreements to be settled through arbitration rather than through litigation in court.

Related guides

• Employee Share Option Scheme