17 March 2026, by Elaine Law Soh Ying, Advocate and Solicitor of the High Court of Malaya
Is it necessary to have a shareholders’ agreement in every business undertaken jointly by two or more shareholders through an incorporated company?
Very often, the relationship between shareholders begins with mutual trust, aligned goals and shared expectations. However, as the business grows or encounters challenges, that relationship will be tested. Let’s be honest: commercial realities hit when a business is either thriving or under financial pressure.
When a business becomes profitable, disputes among shareholders may arise over financial matters, power and control. When the business faces financial pressure, disagreements often stem from differing strategies or funding capabilities. In such situations, what options are available to shareholders? Exit, buy out the other party or wind up the company?
A shareholders’ agreement is therefore essential in managing and governing the commercial aspects of the business relationship between the shareholders. It regulates the performance of their respective roles and responsibilities, and sets out mechanisms to safeguard their rights and interests in the company, including exit strategies. It also plays a key role in protecting minority shareholders, who may otherwise have limited control under the Companies Act 2016 alone.
The parties should discuss the following key terms from the outset when setting up or managing a business together:
Shareholding Structure
(1) Agreed shareholding of each party; and
(2) Circumstances in which shareholding may vary.
Management and Decision-Making
(1) Management by the board of directors; and
(2) Appointment of a managing director or chief executive officer, where applicable.
Directors and Proceedings
(1) Composition of the board of directors;
(2) Right to appoint directors and remove directors;
(3) Reserved matters — decisions requiring unanimous approval or special shareholder approval;
(4) Voting rights; and
(5) Quorum requirements and board proceedings.
Roles and Responsibilities
(1) Roles and responsibilities of each shareholder;
(2) Obligations to the company and to the other shareholders; and
(3) Mutual responsibilities.
Share Transfers
(1) Restrictions on transfer of shares to third parties and pre-emptive rights; and
(2) Mechanisms for transferring shares and valuation methods.
Funding Arrangements
Whether funding will be provided through shareholder loans, additional equity or external financing.
Reserved Matters
(1) Key decisions requiring unanimous or special shareholder approval; and
(2) Additional protections for minority shareholders on matters affecting their interests.
Buy-Out Mechanisms
Circumstances in which a shareholder may be bought out, eg in the event of default, breach of the shareholders’ agreement or an irretrievable breakdown in the relationship.
Tag-Along or Drag-Along Rights
These rights seek to balance the interests of all shareholders:
(1) Tag-along rights allow minority shareholders to participate in a sale by majority shareholders on the same terms; and
(2) Drag-along rights enable majority shareholders to compel minority shareholders to sell their shares for a full company buy-out by a third party.
Deadlock Resolution
Mechanisms to resolve deadlocks, particularly in 50:50 ownership structures or where reserved matters cannot be agreed, to avoid a prolonged stalemate.
The above list is not exhaustive. Shareholders should also ensure that the shareholders’ agreement does not contain terms that breach the company’s constitution or the Companies Act 2016.
In summary, a shareholders’ agreement is a risk management tool. It is highly advisable for parties to agree on the terms governing their business relationship at an early stage to avoid ambiguity, cost and disruption to the business in the future.
Disclaimer
The views expressed in this article are solely those of the author. Readers are advised to seek professional advice before executing a shareholders’ agreement.