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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 out 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 as well 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 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 should a share be sold/transferred, a company could potentially be firefighting every other day on what and what to do in the event shareholders wishes to sell/ transfer their shares.
- It could potentially protect a company from getting bombarded with myriads of legal proceedings by its shareholders for no apparent reasons at all. In the event those allegations hold some water, the agreement allows the company 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 shareholder and the company is allowed to manage the affairs of the company without constantly being interrupted by legal suits from its shareholders.
- It organizes the company’s operation– it lays down a flow and what 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 upon for their 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 Suits1. 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 parties involved disputed as to the content of the oral agreement.
The court, in that case, has no choice but to determine who was right and vice versa based on the evidence, facts, and circumstances that are presented before them. Do you see where does this lead 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!
Consult with a lawyer if you have any dispute regarding shareholders agreement:
1. [2021] 7 MLJ 506.
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