A shareholders’ agreement is an arrangement among shareholders that describes how a company should be operated and outlines shareholders’ rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.

Basics of Shareholders’ Agreement

A shareholders’ agreement is intended to ensure that shareholders are treated fairly and their rights are protected. The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

Many entrepreneurs creating startup companies will want to draft a shareholders’ agreement for initial parties. This is to ensure clarification of what parties originally intended. If disputes arise as the company matures and changes, a written agreement can help resolve issues by serving as a reference point.

Case Study

DC and JR ran a F&B company. At the beginning things were tight and they put all their money into getting the business up and running. They knew about shareholders agreements, but decided not to spend the money on solicitors straight away. They felt that they would be ok initially and that they would put a shareholders agreement in place in the second year once they knew that the business was going to be a success.

Things got busy and they never got around to seeing the solicitor about the shareholders’ agreement.

The business grew nicely and produced DC and JR with a nice income. They were both equal shareholders and directors.

However, over time relations between DC and JR started to deteriorate. There was no single catalyst, but they disagreed regularly with the way in which they both saw the business developing and the types of clients that they should target. Eventually things got so bad that they could not discuss anything without arguing. This had a detrimental effect on the business. It was no longer growing. Strategic decisions were not being taken and profits were falling. Clients sensed the problems and were leaving and employees felt that they were caught in the middle of the feuding owners and were either unhappy and therefore less productive or they left.

Without a shareholders’ agreement in place detailing how the dispute should be settled, it was down to DC and JR to resolve their differences. But they could not.

Their only option therefore was to wind up the company, if they could agree this course of action, or apply to the court for an order that the company is wound up, which would be an expensive process with no guarantee that the court would grant such an order.

A shareholders’ agreement could have included a detailed process for resolving disputes or remedying the situation if they really could not. The dispute resolution procedures can include requiring mediation, where a third party intervenes and attempts to encourage both parties to work through their issues, or it could allow one party to serve notice on the other offering to buy the other’s shares or sell their own shares at a single fixed price. This would ensure that there is a prescriptive procedure allowing for the dispute to be resolved one way or another and for the company to continue trading with the least disruption as possible.

Authored by Chin Kah Wei, Gavie
Managing Partner from JR Ng & Chin | JC Law. You may contact him at chin@jc-law.my

The contents of this publication are given as general information for reference purposes only and do not constitute the firm’s legal advice. For any specific matter or legal issue, please do not rely on this publication but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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