When entrepreneurs register a private limited company (Sdn Bhd) in Malaysia, many assume the legal structure alone is enough to protect their interests. The reality is this: while the Companies Act 2016 provides the legal shell, the true engine of protection — especially among co-founders and investors — lies in a properly drafted Shareholders Agreement.
This one agreement defines how decisions are made, who controls what, and what happens if the unexpected occurs. Done correctly, it sets the business up for long-term clarity. Done wrongly — or ignored altogether — it can lead to expensive, emotional, and business-ending disputes.
3 Benefits of Getting It Right
- Clarity in control and ownership: Avoids future misunderstandings about roles, powers, and expectations.
- Built-in exit and succession plan: Prevents disruption when a shareholder wants to exit, dies, or defaults.
- Customised decision-making rights: Allows founders to define reserved matters, voting thresholds, and veto powers.
3 Consequences of Getting It Wrong
- Shareholder deadlock over business strategy or company direction, paralyzing the business.
- Loss of control to outsiders due to forced share transfers from death, divorce, or bankruptcy.
- Costly litigation and breakdown of trust, often dragging the company through years of court battles.
The best part? The cost of doing a shareholders agreement is low, affordable, and immensely worthwhile — especially when measured against the cost of conflict.
1. Reserved Matters: Controlling the Big Decisions
Many founders wrongly assume that as long as they are directors or hold majority shares, they can control the company. But in reality, some of the most critical decisions — such as issuing new shares, changing business direction, or appointing key personnel — can only be made effectively when “reserved matters” are clearly defined and agreed upon in a shareholders agreement.
Take the case of Koh Kim Teck & Ors v T & C Holdings Sdn Bhd & Ors [2007] 5 MLJ 28. The dispute involved two equal shareholders. One side took strategic decisions without proper consultation, assuming operational control. The other side challenged those actions, leading to a petition under Section 181 of the Companies Act 1965 (now replaced by Section 346 of the Companies Act 2016) for oppression.
A properly drafted shareholders agreement would have solved this by listing out reserved matters — key decisions that require unanimous or supermajority approval by shareholders.
These typically include:
- Appointment or removal of directors
- Changes to share capital
- Acquisition or disposal of significant assets
- Declaration of dividends
- Entry into major contracts or loans
While Section 291 and 292 of the Companies Act 2016 provide for ordinary and special resolutions, they don’t define how “big” decisions can be agreed upon. A shareholders agreement allows the parties to go beyond statutory defaults and establish tighter controls over sensitive decisions.
A lot of people think the board of directors makes all decisions, but actually, shareholders can reserve certain rights to themselves — and even require their written consent for specific actions.
FAQ: If I’m the majority shareholder, why should I worry about reserved matters?
Because even majority holders may face restrictions without an agreement. For example, the company constitution or equitable duties may still require consultation — and courts are slow to accept unilateral action without express authority.
2. Exit Mechanisms: Planning for Death, Departure, or Disputes
One of the most overlooked but vital features of a shareholders agreement is the exit mechanism. Every shareholder will eventually exit — whether through sale, retirement, dispute, or death. Without a plan, that exit can create a legal and financial mess.
Imagine this: A startup with three equal shareholders succeeds in raising investor funds. A year later, one shareholder wants out and demands to sell his shares to an external party. The remaining two disagree but have no legal right to stop it. The shares are sold to a stranger, who now has access to company information and voting rights — disrupting the original founders’ vision.
A well-drafted shareholders agreement includes:
- Right of first refusal: giving existing shareholders the first chance to buy
- Tag-along rights: allowing minority shareholders to join a sale if majority exits
- Drag-along rights: letting majority force a full sale to a third party
- Compulsory buy-out triggers: such as death, disability, resignation, or default
The Companies Act 2016 does not automatically grant these rights. Section 51 allows restrictions on share transfers in private companies, but without clear terms in an agreement, those rights are non-existent.
In Ho Yew Kong v Soo Shew Keong [2016] MLJU 1086, the court had to intervene when shareholders could not agree on a buyout after a deadlock. Without a prior agreement, the dispute dragged on and the company suffered significant losses.
A lot of people think the will of a deceased shareholder governs what happens to their shares, but actually, unless there’s a buy-back clause in the shareholders agreement, shares can pass to family members — even if they have no business involvement.
FAQ: Can we force a shareholder to sell their shares if they stop working in the company?
Yes — but only if your agreement includes a compulsory buy-out clause triggered by resignation, inactivity, or breach. Otherwise, they can remain a shareholder indefinitely.
3. Safeguarding Minority Shareholders and Balancing Contributions
Not all shareholders contribute equally. Some inject capital, others contribute expertise or operational effort. The challenge lies in balancing ownership rights with real-world contributions, especially when profits and control are at stake.
In Gan Chiew Hin v Tan Kim Kiat [2009] 6 MLJ 514, the minority shareholder alleged oppression when he was excluded from management decisions and denied dividends. The court agreed that the conduct was oppressive under the Companies Act, even though the majority shareholder technically had legal control.
With a shareholders agreement, the parties can:
- Create tailored voting rights or board appointment rights
- Stipulate minimum director involvement or operational roles
- Define dividend policies that are not purely share-based
- Prevent dilution through issuance of new shares without consent
Section 346 of the Companies Act 2016 allows aggrieved shareholders to petition for oppression — but this is costly, uncertain, and damaging. A clear agreement makes it unnecessary.
A lot of people think equal shares mean equal say and equal returns, but actually, rights and returns can be customised if agreed in writing.
FAQ: I invested more capital than my co-founder, can I get higher returns?
Yes — but not automatically. Your agreement must clearly state that your capital entitles you to preferred dividends, higher votes, or priority in a buy-back.
4. Protecting Business Continuity and Avoiding Deadlock
Companies without a shareholders agreement are especially vulnerable to deadlock — when shareholders or directors cannot agree, and no party has sufficient majority to move forward. This is common in 50-50 partnerships or where there are factions in equal strength.
In Sivalingam a/l Periasamy v Sia Siew Chin [2022] MLJU 330, the two shareholders of a logistics company could not agree on operations. Each attempted to block the other’s decisions, ultimately halting the company’s bank access, supplier contracts, and payments. The company bled losses for months while the court deliberated over deadlock proceedings.
Deadlocks are devastating because:
- Banks may suspend facilities if internal control is unclear
- Suppliers may stop deliveries if payments are delayed
- Employees may resign due to instability
A shareholders agreement can include:
- Deadlock resolution mechanisms (e.g., escalation to third-party advisor, mediation, Russian roulette clause)
- Chairperson’s casting vote
- Buy-out triggers upon persistent disagreement
Section 233 of the Companies Act 2016 allows companies to apply for judicial management or winding up in cases of deadlock, but these are nuclear options. Prevention is always better — and far cheaper.
FAQ: What can we do if two equal shareholders can’t agree on a key decision?
If your shareholders agreement includes a deadlock resolution clause, you can activate a structured process — such as mediation, referral to a neutral advisor, or a pre-agreed buyout mechanism. Without this, the only fallback may be costly litigation or even winding up under Section 465 of the Companies Act 2016. That’s why pre-emptively planning for disagreement is just as important as planning for success.
Final Words: Draft It Before You Need It
A shareholders agreement is not just a legal formality — it is a shield, compass, and safety valve for your Sdn Bhd. It gives every shareholder — majority or minority — a clear, enforceable understanding of their rights, roles, and remedies.
In Malaysia, where many companies are formed between friends, family, or co-founders with mutual trust, the risk lies in assuming that goodwill will last forever. It rarely does.
You don’t need to be a listed company or startup unicorn to justify a shareholders agreement. Even a two-person logistics firm, a digital agency, or a family-run construction business can benefit — and avoid irreversible mistakes.
For all Sdn Bhds, whether new or established, the right time to do it is before it’s tested in court. Because once relationships sour, drafting an agreement is no longer an option — it becomes a legal battleground.
