In terms of corporate law, a shareholder agreement consists of the terms and agreements between the shareholder and the company. The agreement should include the shareholder’s rights, duties as well as other specifications to prevent future disputes and unjust.
Shareholder agreements ensure that there is a legally binding relationship between the company and the shareholders. Without a shareholder agreement, the relationship would be vague and the agreements could be invalid. Both parties could be in difficulty when a legal issue arises.
In Malaysia, it is crucial for companies to prepare a well-structured shareholder agreement that consists of terms and conditions regarding the shareholder and the company’s rights.
Let’s dig deeper into why shareholder agreements are essential:
Table of Contents
1. Protect Shareholder Rights
Shareholders are separate legal entities who own part of the company’s stock. When a company flourishes, the shareholders are able to enjoy the benefits as well. The company also relies on shareholders to overlook the operations, finance, and corporate governance in the company.
Shareholder agreements are put in place to help both parties establish a good relationship with each other. To do this, both parties must discuss and negotiate the terms and conditions that will be beneficial for both entities in the relationship.
Shareholder agreements will help shareholders to protect their rights for access to the company’s financial records, voting rights, and their rights to buy shares.
Shareholder Rights To Financial Statements
Shareholders have the right to view the company’s financial statements to better evaluate the value of the company. Through financial statements, shareholders would be able to make the appropriate decisions on corporate issues.
Without the financial statements, the shareholders would have no knowledge of the company’s capabilities and would make decisions that might be detrimental to the company instead.
The company could not reject shareholders from viewing the financial statements as the shareholders should have access to this information. In the case that the company rejects the shareholders from viewing the company’s records, the shareholder could justify their rights with the shareholder’s agreement.
Shareholder Voting Rights
Each shareholder might not own the same amount of shares. Shareholders also might not have an equal amount of voting rights. This difference could spark prejudice amongst shareholders.
It is important to have a shareholder agreement to set the grounds on the relationship and roles between shareholders because all shareholders are entitled to voting rights for the better of the company.
Having a shareholder agreement would ensure that all shareholders have the rights to vote for the board of directors as well as the power to elect a director to step down in the case that the director is deemed inefficient for the success of the company.
Protect Minority Shareholders
The level of ownership in shares varies amongst shareholders, so there are minority shareholders and majority shareholders. The shareholder agreements also help to protect minority shareholders so that the minority shareholders are not mistreated.
Despite owning less than 50 percent of company shares, the minority shareholder still holds the rights to vote and attend general meetings. Minority shareholders also have the rights to inspect general meeting minutes, and even elect to remove company directors.
However, quite often minority shareholders are deprived of their rights due to prejudice. With shareholder agreements, the minority shareholders’ rights would be protected and there would not be any issue of prejudice.
Protect Majority Shareholders
The shareholder agreement does not only benefit the minority shareholders but also the major shareholders who own more than 50 percent of the company’s shares.
A complete shareholder agreement would include clauses that allows majority shareholders to have the power to ensure that minority shareholders follow along in the sale of the company. Subsequently, shareholder agreements also ensure that those who want to sell their shares must first offer their shares to internal shareholders first.
The shareholder agreements ensure that every shareholder is entitled to their rights. Shareholders have an influence on the management system by having voting rights and also the chance to buy more shares. The company would not be able to hide suspicious activities from shareholders and shareholders could hold the company liable for any dishonest acts.
2. Ownership Transfer
What happens when a shareholder passes away? Disputes are bound to happen when there is no proper shareholder agreement in place. People would have different opinions on how to value the shares. It would also be difficult to determine who will inherit the shares if not written in the deceased will.
The company could refer to the shareholder agreement as a guide on how to value their shares accordingly. There should also be a guideline to determine who will inherit the shares if the shares are not mentioned in their will.
There are also a number of shareholders that might be interested to sell their shares. There are a few reasons as to why shareholders sell their shares. They might want to move on to another job and their shares are under the employee shares or the owner of the company wants to quit and is looking for investors to sell their shares.
A shareholder agreement should include complete details about the rules of ownership transfer to avoid any misunderstandings when there is an ownership transfer. If the shareholder agreement does not state ownership transfer, the company could be at risk of constantly changing shareholders and it would not be efficient for the company.
3. Protect The Company From False Accusations
The shareholder agreements will protect the company from irresponsible shareholders. When a shareholder is not fulfilling their duties or constantly being absent from general meetings and unavailable, the company could use the shareholder agreement to reinforce the duties that the shareholder is neglecting.
Shareholder agreements would be able to protect the company in case there are false accusations against the company. When a shareholder wants to hold the company liable for a certain incident, the shareholder agreement will be able to help lawyers determine how to approach the case.
With shareholder agreement, there will be proof of the terms and conditions discussed between the shareholders and the company. It helps to have a guideline on the duties and rules that the company has to follow, this way the organization would be more orderly.
Shareholder rights and duties is a very important segment in shareholder agreements. Both parties must decide what shareholders’ roles are and the parties could be held accountable if one does not fulfill their duties. This helps to prevent irresponsible shareholders and ensure that the shareholders play a significant role in the company’s efficiency.
The shareholder agreements will help to ensure that the relationship between the company and the shareholders is fair. The written agreement legalizes the terms and conditions that are on the agreement and either side of the party could pursue legal action if one party breaches the contract.
4. Organize Company Operations
A shareholder agreement does not only consist of the shareholder and the company’s duties. It also consists of the terms that both parties have agreed to about the company’s operations. A shareholder agreement contains details such as how the company would present their financial statements to the shareholders and how often shareholders are obliged to attend the general meetings.
A shareholder agreement sets up rules for shareholders to follow. This ensures that all shareholders are in place and are following the set of agreements. The shareholder agreement has the basic rules on how shareholders could make decisions.
With a proper shareholder agreement in place, it would be easier for companies to manage their shareholders and for shareholders to manage their duties. The company operations would be more efficient and organized.
5. Prevent Disputes From Overly Escalating
When running a business it’s not uncommon to encounter divided opinions, technical difficulties, legal matters, and many more. If the issues that arise are continuously provoked, sooner or later the matter would turn into a dispute.
Even big companies such as Facebook has had their fair share of disputes. When Mark Zuckerberg just started, he had a dispute with the co-founder, Eduardo Saverin. Saverin played a big part in investing on Facebook, but when Zuckerberg found that Saverin was not doing his duties, he decided that Saverin should be cut off from the company.
On top of that Zuckerberg and Saverin had differing opinions. Saverin had started his own job board website called Joboozle knowing that Facebook had plans to delve into jobs in the future. Saverin, in other words, was competing with Facebook.
If Mark Zuckerberg had not taken the chance to kick Saverin out of the company, Facebook would not have been the Facebook we all know and love today. Although Saverin was considered a stockholder in the company, similar issues could arise with shareholders.
When shareholders neglect their duties or have differing opinions, conflicts would arise. Dealing with disputes in a company could lead to a legal issue and the issue could be taken to court.
When it comes to legal issues, there are chances that the matter will not be solved amicably. This will spark awareness for future shareholders and staff. The company would lose its reputation and future investors.
A shareholder agreement would prevent disputes from escalating as both parties would have a guideline on how they could resolve the matter. Both parties would be able to negotiate and come up to a solution. The issue could be amicably resolved and the company would be able to hold its reputation.
Can I Draft My Own Shareholder Agreement?
Yes, it is possible for businesses to draft their own shareholder agreements. However, given how important shareholder agreements are, it is crucial for the contents of shareholder agreements to be very detailed and well thought out.
If the shareholder agreement is not complete, the company could get in trouble as people might try to find the loopholes in the contract and use it for their own benefits. To avoid this issue, it is best to draft a shareholder agreement with a lawyer’s help.
If you are a business owner who is looking for legal advice on how to draft a professional shareholder’s agreement, feel free to contact Sim & Rahman for more information.