Shareholder Agreement/ Constitution Questions.

Why do you need a Shareholder Agreement/ Constitution?

On starting a company with more than one shareholder, shareholders are often advised to make a Shareholders’ Agreement /constitution, regardless the size of the company, in order to further regulate the way business between them is to be conducted.

  1. Resolution of disputes

If disputes do occur, how does the shareholder deal with it? There can be specific provisions for dealing with disputes laid down. Instead of fighting in the court that may lead to loss of friend/partner, there are other mechanisms available to resolve the disputes between the parties so long as party have a pre-agreed agreement.

  1. Regulate management of the company

Generally, the running of the company is left to the board of directors. However, to prevent abuse of power by the directors, the shareholders may believe that there are certain major decisions that should not be left to the discretion of the directors and instead require shareholder approval, particularly if there are directors who are not shareholders for example: the change of business direction, the appointment of key personnel, the use/disposal of substantial assets/ funds of the company.

  1. Offers protection for minority shareholders

A shareholders’ agreement can provide protection for minority shareholders by reserving certain decisions, such as the ability for the company to issue further shares, or to dilute the minority shareholder, which can only by made with the unanimous consent of all the shareholders. The agreement may also contain “tag along” provisions, which enables a minority shareholder to “tag on” to a majority shareholder in a share sale situation where the majority attempt to sell only their shares rather than seeking to find a buyer for all the shareholders.

  1. Offers protection for majority shareholders

“Drag along” provisions would usually operate where an offer is received to buy all of the shares in a company and the majority shareholders wish to accept that offer. The rights allow the majority to force the holders of the remaining shares to accept the offer on the same terms so that they do not scupper the deal.   

  1. Control the transfer/sale of shares

A Shareholders’ Agreement can provide a mechanism which, where one shareholder wishes to sell their shares, effectively gives the other shareholders or the company (as the case may be) a “right of first refusal” over those shares.

This can be used to try and restrict who may or may not acquire shares in the company.  

This can be a useful tool, particularly for small businesses that may wish for the initial shareholders to retain the shares, rather than allow external investors and unknown individuals to come in. After all, you have gone into business with your business partner for a reason.

  1. Restrictions/ Non-competition

In the event that a shareholder seeks to exit the company, the remaining shareholders may wish for restrictions to apply to the exiting shareholders’ ability to set up or work in a competing business. These restrictions can be stricter than may exist in any employment contract and can be very valuable in protecting the interests of the company moving forward.

  1. Demonstrates business stability

Having a Shareholders’ Agreement can demonstrate stability for your business, with the inference that you have planned ahead in order that any dispute will be easily and swiftly dealt with. This is important in particular for banks and other creditors that may be looking to invest in your company. 

  1. Can offer a varied dividend policy

A Shareholders’ Agreement can set out a varied dividend policy which may allow different dividends to be payable to each shareholder, where they have different classes of shares.

These are just a few of the reasons why a Shareholders’ Agreement/ Constitution is important and useful for a company to have in each individual shareholders. Shareholders are advised to engage professional lawyer to have all the agreements and protections in place.

I would like to issue shares to other potential investors to invest in my company, how could I do it? 

Private companies

In general, for allotment of new shares of a private company to new identified investors to increase its issued and paid-up capital, the prior approval of majority of existing shareholders by way of resolution must be obtained so that the board of directors is authorised by the shareholders to allot and issue new shares to identified investors. The issue or subscription price per share shall be determined by the board of directors in the best interest of the company. 

If the new shares to be issued to investors rank equally to existing shares as to voting or distribution rights, subject to the company’s Constitution, such shares shall first be offered and issued to the holders of existing shares in proportion to such holders’ shareholding.

Upon payment of the issue or subscription price by the identified investors, the company shall issue such number of shares allotted to each investor accordingly. A share certificate in respect of the allotted shares will be issued to each investor upon request. A return of allotment of shares must be lodged with the SSM and the register of members of the company must be updated accordingly.

Public companies

Subject to the company’s Constitution, the process of issue of new shares for public companies is rather similar to that for public companies except that a statement in lieu of prospectus in compliance with the New Act must be lodged with the SSM at least 3 days before the first allotment of shares of a public company. Such statement in lieu of prospectus must contain information such as, the background of the company, the board of directors, total funds to be raised, subscription price per lot, the opening date and the closing date of the issue, usage of funds, dividend rates and other information prescribed by Part I of Second Schedule of the New Act. This statement in lieu of prospectus accompanied by an application for shares form is usually circulated to identified investors for their information and application for shares.

Issue of shares of public listed companies must comply with the Listing Requirements of the Bursa Malaysia Securities Berhad.

Further Inquiries?
You may contact our panel lawyers/ the author of this article.