A shareholders’ agreement is a foundational legal document for any startup with multiple shareholders. While the Companies Act 2016 (“CA 2016”) and a company’s constitution govern statutory rights and corporate structure, a shareholders’ agreement is a private contract that governs the business relationship between shareholders, provides clarity on rights and obligations, and fills gaps left by statutory law.
The enforceability of terms under a shareholders’ agreement has been affirmed by Malaysian courts and is crucial for minimising disputes and protecting shareholder interests as the startup grows.
This article explores some of the key and important clauses that shareholders, startup founders or co-founders should consider when drafting or agreeing to a shareholders’ agreement.
Pre-Emptive Rights and Anti-Dilution Protections
(1) Subject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders.
(2) An offer under subsection (1) shall be made to the holders of existing shares in a notice specifying the number of shares offered and the time frame of the offer within which the offer, if not accepted, is deemed to be declined.
(3) If the offer is not accepted after the expiry of the period specified in the notice under subsection (2), the directors may dispose those shares in such manner as the directors think most beneficial to the company.
It must be noted, however, that such pre-emptive rights may be subject to the constitution, and as such, care must be exercised in drafting the company’s constitution, particularly in articles or clauses that relate to pre-emptive rights to new shares.
Right Of First Refusal
Founders, co-founders and shareholders may also consider a clause prescribing a right of first refusal. This will have the effect of ensuring that the current shareholders are given a right to purchase the shares intended to be sold and, only where none of the current shareholders intend to purchase the shares, can the shares be sold to a third party. This right of first refusal has been enforced by the Courts in Malaysia.
A share transfer restriction may also be considered to ensure that the shares are not transferred or purchased by certain parties such as competitors.
Tag-Along or Drag-Along Rights
These clauses govern exit scenarios and align the interests of majority and minority shareholders. These must be clearly drafted to ensure enforceability when the conditions for such rights are triggered.
Deadlock Resolution
This is particularly important when there is an equal number of voting shares which may result in a deadlock or tie in votes (e.g. 50/50 ownership). In such circumstances, especially in exit situations, it is important that there be such deadlock resolution clauses to ensure a timely resolution of the vote and avoid missing or passing on an important opportunity, decision or milestone.
Conclusion
A well-drafted shareholders’ agreement is foundational to a startup’s legal and commercial structure. Beyond clarifying rights and obligations, carefully drafted clauses backed by Malaysian statutory law and informed by judicial decisions can reduce disputes, protect minority interests, and provide certainty for founders and investors alike.
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