Is there a need to have shareholders’ agreement and constitution?


Do shareholders need a shareholders’ agreement? 

A shareholders’ agreement governs the relationship between shareholders of a company. Where there is more than one shareholder, it is prudent to have a shareholders’ agreement to set out their respective rights and obligations although a shareholders’ agreement is not mandatory under the law. 

Whether a company should be made a party to the shareholders’ agreement depends on whether the company has any rights or obligations under the agreement.  

A shareholders’ agreement typically sets out clauses relating to appointment of directors, quorum required for a shareholders’ or board meeting to be valid, procedures for directors or shareholders to decide on matters relating to the company, whether there are any reserved matters that require unanimous decision at shareholders’ or board meeting, how deadlock is resolved, transfer of shares and the rights and responsibilities of each shareholder. 

Some business owners rely on Google for sample clauses or precedents for shareholders’ agreements. Google is not the answer in such instance. Each shareholders’ agreement should be tailored to meet the shareholders’ specific requirements and circumstances. The shareholders’ responsibilities should be set out clearly, which may differ on a case-by-case basis, depending on the nature of business undertaken by the company. 

Should a company have a constitution? 

The next step after execution of a shareholders’ agreement is to amend the constitution of the company (if there is one) to be consistent with the shareholders’ agreement.  

A company without a constitution should consider adopting one which is consistent with the shareholders’ agreement.  

Save for a company limited by guarantee, it is not mandatory for a company to have a constitution under the Companies Act 2016. However, it would be easier for the company, directors and shareholders to have their rights, duties and powers to be set out in one document i.e. the constitution, compared to being governed by various default provisions under the Companies Act 2016. 

Whilst shareholders’ agreements may provide that the terms in the shareholders’ agreements prevail over constitutions in the event of inconsistencies, caselaw has shown that there are limitations in relying on an inconsistency clause in a shareholders’ agreement to override the provisions of a company’s constitution. 

In addition, a company’s constitution has wider legal effect than a shareholders’ agreement. A company’s constitution binds the company, its shareholders as well as its directors whereas a shareholders’ agreement binds the shareholders and the company (if it is a party to the agreement) only.

To give full effect to a shareholders’ agreement, the relevant provisions should be incorporated into the constitution of the company. 

Procedural requirements under Companies Act 2016 

The company must lodge the constitution with the Registrar of Companies within 30 days from adoption of the constitution. Failure to do so is an offence. On conviction, the company and its officers are liable to a fine not exceeding RM50,000. 

If the constitution is amended, the company must notify the Registrar of Companies of the amendment by filing the necessary form and lodge a copy of the amended constitution within 30 days from the date a special resolution was passed to amend the constitution. Failure to do so is an offence. On conviction, the company and its officers are liable to a fine not exceeding RM10,000. 

For both offences stated above, the company and its officers are liable to a further fine not exceeding RM500 for each day during which the offence continues after conviction. 

The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice. 

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