You may be thinking of starting your own business with a few of your business partners. You heard that it is important to have a Shareholders Agreement as part of the process. So what is it and why you should be concern with it. Here in this article we try to have an overview of the frequent asked questions about a Shareholders Agreement so you have a head start on the topic before you take your next big step.
Shareholders Agreement
A shareholders agreement is just that. It is an agreement to regulate the relationship and expectation of each shareholders in a company. Despite the many forms and template available online, you need to understand that the law that governs the terms and conditions of the shareholders agreement for a company that is being incorporated in Malaysia is pretty much must be based on the enacted laws in Malaysia and not other jurisdictions.
Shareholders in a Shareholders Agreement
The parties that usually would sign and be part of the shareholders agreement are usually the shareholders in the company to be incorporated itself. In cases where the company has already been incorporated, the Company itself may be part of the party executing the agreement provided there are parts of the agreement that compels the Company to adhere to the terms of the Shareholders Agreement.
Aside from the shareholders who may be party to a Shareholders Agreement
Aside from shareholders being part of the Shareholders Agreement, the Company which is related to the Shareholders Agreement being made may also be made a party to the agreement.
This is usually the case if at the time of the execution of the Shareholders Agreement the Company has been incorporated. When a Company is bound to the Shareholders Agreement, as a Shareholder it would be easier then to compel the Company to follow through the covenant and undertaking the Company has made in the agreement.
The objective of a Shareholders Agreement
Thought I did mentioned that the purpose of the Shareholders Agreement is to regulate the relationship of the Shareholders in the Company, I would not be doing any justice if I just stop at that. Let me break this down further. Among the critical components that should be covered in a Shareholders Agreement which relates managing the expectation of the shareholders in the agreement are;
The business objective that the company will pursue utilising the capital raise from the Shareholders
The initial issued shares and the capital to be raised(paid by each Shareholders) by the company from the Shareholders
The seat allocation of the directors to be appointed by each Shareholders and the conditions attached to it
Matters that required majority decision by Shareholders and matters that require consent by specific Shareholders
The warranty and representation by each shareholders (if any) as to their role in the business objective of the company
The specific articles that the Shareholders will procure the Company must adopt as part of its company constitution
The specific methods that the Company are allowed to raise capital such as shareholders loan, issuance for preference shares and loans
The scheme and mechanics in the event any of the Shareholders intend to exit or sale a portion of his shares in the Company
Tag along and drag along rights in relation to the sale of shares of a specific Shareholders in the Company
Events that should be considered as material breach
Dispute resolution mechanism to resolve issues or deadlock scenarios between Shareholders
Are businesses in Malaysia require shareholders agreement
Businesses who are companies are not compulsory to have a Shareholders Agreement. But it is pretty much a good practice to have it in place prior to setting up the Company as you will have ironed out critical components of your Company before any issues arise. This will allow everyone on the same page as to how the company and its operation will function.
Is a Shareholders Agreement related to corporate law?
Yes. Corporate law fuels the essence of the Shareholders Agreement terms and conditions. Anything that is allowed under the Companies Act 2016 can be a term or condition in the agreement. Since a Shareholders Agreement is in relation to the operation of a Company, Companies Act 2016 pretty much is the essence of law that will be used to direct the manner a Shareholders Agreement being shape along with other laws such as the Contracts Act 1950.
How does a company law affect the outcome of a Shareholders Agreement?
If a clause in a Shareholders Agreement is illegal due to its inconsistency and in conflict with the Companies Act 2016, it may render the said clause in the agreement void.
How does a Shareholders Agreement affect the Shareholders
A Shareholders Agreement binds the Shareholders legally and we be bound to perform as to what is agreed between the Shareholders. In the event that a Shareholders mistakenly given a wrong fact, represent fraudulently the facts to other parties or in a position of undue influence, the Shareholder affected may go to court and requests the said Agreement to be made void and that it to be restored from any lost that it may have incurred in entering such agreement.
By having a Shareholders Agreement in place, a Shareholder may also enforce specific terms that have been agreed by the defaulting Shareholder but defaulted in its performance.
What role director plays in respect of a shareholders agreement
A Shareholders Agreement could dictate the scope of the performance of the director to be appointed in the Company. A Shareholders Agreement also to then extend designate a specific person that is to be appointed as the Director of the Company provided the said person consent to the said appointment and allowed to be appointed as a director under the applicable law.
What type of company affected by a Shareholders Agreement
A Shareholders Agreement usually concerns with a private limited company which is called a Sendirian Berhad in Malaysia or a limited company also known as a Berhad in Malaysia.
Who can draft a Shareholders Agreement
Since a Shareholders Agreement is within the realm of corporate law, under the Legal Profession Act 1976, only individuals admitted to the High Court with a practicing certificate under Section 27 of the Legal Profession Act 1976 may advise and draft the Shareholders said Agreement. These license individuals are also known as lawyers.
Any other individuals that advices or provide services in relation the practice of law is an offence under Section 37(2A) of the Legal Profession Act 1976. That section states;
(2A) Any unauthorized person who does or solicits the right to do any act which is customarily within the function or responsibility of an advocate and solicitor, including but not limited to advising on law, whether Malaysian or otherwise, unless he proves that the act was not done for or in expectation of any fee, gain or reward, shall be guilty of an offence under this subsection.
The punishment of the said person acting as a lawyer under Section 37(1) under the Legal Profession Act are as follows;
"...shall be guilty of an offence and shall on conviction be liable to a fine not exceeding two thousand five hundred ringgit or to imprisonment for a term not exceeding six months or to both."
How can Company effect a Shareholders Agreement in terms Company Constitution
Effecting a shareholders agreement terms in company constitution
Once a Shareholders Agreement duly executed between the parties, the Shareholders may then procure the Company to lodge an amendment to the Constitution under Section 36 of the Companies Act 2016 to duly reflect the terms whichever applicable.
I am business registered under the Registration of Businesses Act 1956. Can I have a Shareholders Agreement?
A Shareholders Agreement is best suite for businesses incorporated under the Companies Act 2016. For a business that consists of partners and not an incorporated company, a Partnership Agreement is more suitable to govern the roles of the partners.
Starting a business in Malaysia as a foreign company and the role of a shareholders agreement
If you are a foreign company and intend to setup business in Malaysia, you must firstly register your foreign company first as required under Section 561 of the Companies Act 2016.
You shall also be required under the Companies Act 2016 to;
Submit specific information to the registrar under Section 562;
To appoint your agent that will be responsible for your company in Malaysia under Section 563;
To have the foreign company to be registered in its name under Section 564;
To have a registered office in Malaysia that shall receive communication and accessible to the public under Section 566.
In view of the above requirements, a Shareholders Agreement would allow you to agree and resolve on the terms and setup of your operation here in Malaysia.
Director’s loan in a shareholders agreement
In general a company should not make available a loan to a director in a company under Section 224 of the Companies Act 2016. However, there are exceptions to this under the same section. On that note, a Shareholders Agreement may be able to lay down the agreement between the Shareholders in relation to scheme of loan provided to the extend allowed in the Companies Act 2016.
Does a share sale terms and conditions need to be included in a the Shareholders Agreement
Most often than not, terms in relation to the mechanics on the transfers of shares between Shareholders or to third parties are put in a Shareholders Agreement. The terms will usually tell whether a Shareholders may freely sell the shares or that it may require to firstly sell its shares to other Shareholders first before selling to a third party.
In other circumstances a series of events may also be laid down in an event of exit of a Shareholder due to the full sale of its shares in the Company.