Is It Important To Have A Shareholders Agreement?



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Is It Important To Have A Shareholders Agreement

Is It Important to Have a Shareholders Agreement?

A shareholders’ agreement is an agreement between shareholders and the company that describes how a company should be operated and outlines shareholders’ rights and obligations in that particular company.

Is It Necessary to Have a Shareholder Agreement Between the Company and a Shareholder?

No. However, it is good to have one, especially if a company has more than one shareholder. This would ensure that everyone’s rights are put in black and white to prevent any misunderstanding that could potentially lead to a dispute between the company shareholders.

The Importance of Having a Shareholder Agreement

  • It protects the shareholders’ rights, such as:
    • The right to view the company’s financial statements. This allows shareholders to make an informed decision on corporate issues as compared to making armchair decisions that might be detrimental to the company. Having it written in black and white could also ensure that companies run their affairs to the best of their capabilities, as they are now constantly being monitored by their shareholders, who can potentially bring a suit against the company should the company be mismanaged.
    • The right to vote. All shareholders are entitled to vote. Having a shareholders’ agreement means all shareholders have the right to vote for the betterment of the company, such as voting for the inclusion of a shareholder into the board of directors, or voting for the expulsion of a director in situations where the director is said to be inefficient, not acting in the best interest of the company, mismanaging the company, etc.
  • It ensures proper governance of shares in relation to the ownership of the shares:
    • Picture this — what happens to shareholders’ shares when they pass away? How do you value the shares? Who will inherit the shares (assuming it is not inked down in a will)? Hence why it is important to have a shareholder agreement — it acts as a guide for the above situations.
    • Shareholders might (due to various reasons) sell/transfer their shares as well. Without proper guidance on how a share should be sold/transferred, a company could potentially be firefighting every other day on what to do in the event shareholders wish to sell/transfer their shares.
  • It could potentially protect a company from getting bombarded with a myriad of legal proceedings by its shareholders for no apparent reason at all. In the event those allegations hold some water, the agreement allows the company’s legal team to determine whether the shareholder’s claim is justifiable and vice versa, as there will be proof of the terms and conditions discussed, agreed upon, and signed between the shareholders and the company in the shareholders’ agreement. This ensures that there is a check and balance between the shareholders and the company, as a shareholder has to ensure that the company is constantly doing what is best for the company and its shareholders, and the company is allowed to manage its affairs without constantly being interrupted by legal suits from its shareholders.
  • It organizes the company’s operation — it lays down a flow and how certain things are to be done in a company. This would make it easier for companies to manage their shareholders and for shareholders to manage their duties, thus creating an organized and efficient structure on which the company can depend for its operations every day, without unnecessary hindrance caused by itself or its shareholders.

So What Happens If a Company Does Not Have a Shareholders’ Agreement? What Happens If Things Go South?

This was exactly what happened in the case of ISM Sdn Bhd v Queensway Nominees (Asing) Sdn Bhd & Ors And Other Suits [2021] 7 MLJ 506. To cut the long story very short, parties entered into a joint venture, yet no formal shareholders’ agreement (merely an oral one) was executed between the parties involved. Things went south and the parties involved disputed as to the content of the oral agreement.

The court, in that case, had no choice but to determine who was right and vice versa based on the evidence, facts, and circumstances that were presented before them. Do you see where this leads to? An errant party could have escaped liability simply because the court does not have any concrete evidence to go by when determining a dispute!

Frequently Asked Questions (FAQ)

1. Is a company legally required to have a shareholders’ agreement?

No, it is not necessary. However, it is good to have one, especially if a company has more than one shareholder, to ensure everyone’s rights are put in black and white and to prevent misunderstandings that could lead to a dispute.

2. What happens to a shareholder’s shares if they pass away without a shareholders’ agreement in place?

Without a shareholders’ agreement, there’s no clear guide on how the shares should be valued or who will inherit them (assuming it is not inked down in a will) — this is exactly the kind of situation a shareholders’ agreement is meant to address.

3. What happened in the ISM Sdn Bhd v Queensway Nominees case?

Parties entered into a joint venture with only an oral agreement, and no formal shareholders’ agreement was executed. When things went south, the parties disputed the content of the oral agreement, and the court had no choice but to determine who was right based on the evidence, facts and circumstances presented — meaning an errant party could escape liability simply because there was no concrete evidence to go by.

4. Can a shareholders’ agreement protect a company from baseless lawsuits by its own shareholders?

Yes. It could potentially protect a company from getting bombarded with a myriad of legal proceedings by its shareholders for no apparent reason, since the agreement provides proof of the terms and conditions discussed, agreed upon, and signed between the shareholders and the company.

5. What rights does a shareholders’ agreement typically protect?

It protects rights such as the right to view the company’s financial statements and the right to vote, including voting on the inclusion of a shareholder into the board of directors or the expulsion of a director acting against the company’s best interests.

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Don’t Have a Shareholders’ Agreement Yet?

Fareez Shah & Partners assists companies and shareholders across Malaysia in drafting and enforcing shareholders’ agreements. We can help you with:

  • Drafting a shareholders’ agreement tailored to your company
  • Structuring share transfer, valuation, and inheritance provisions
  • Advising on shareholders’ rights, voting, and governance
  • Resolving disputes arising from oral or informal agreements
  • General corporate and joint venture advice

Put your shareholders’ rights in black and white before a dispute arises. Get professional legal guidance today.