# Shareholders Agreements in Malaysia — What the Document Can and Cannot Override

> Where a Malaysian shareholders agreement stops and the Companies Act 2016 takes over — the clauses that must sit in the constitution instead, and the oppression remedy under s.346 that no agreement can exclude.

- Category: business
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/business/shareholders-agreement-malaysia

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Two founders sign a twenty-page shareholders agreement. It gives each of them a board
seat, a veto over new share issues, and a right of first refusal on transfers. Nobody
adopts a constitution, because the Companies Act 2016 made one optional.

Three years later one founder issues shares to a friend, appoints a third director, and
transfers part of his holding. Every one of those acts breaches the agreement. Not one of
them is invalid.

That is the gap. A shareholders agreement is a contract; a constitution is part of the
company's own machinery. Knowing which clauses need which document is most of the skill.

## What is the legal difference between the two documents?

| | Shareholders agreement | Constitution |
| --- | --- | --- |
| Binds | Only the parties who sign | The company, its directors and every member — ss.32(3), 33(1) |
| Public | No, stays private | Yes, lodged with SSM within 30 days — s.32(4) |
| Amended by | Whatever it says, usually unanimity | Special resolution, 75% — ss.36, 292 |
| Effect of breach | Damages, injunction, specific performance against a party | The act may be void or the company may be unable to give effect to it |
| Reaches a new shareholder | Only by deed of adherence | Automatically |
| Can override the Act | No | No — s.32(2) |

Section 33(1) is worth reading closely: the constitution binds the company and the members
**as if it had been signed and sealed by each member** and contained covenants by each of
them to observe its provisions. That statutory deeming is exactly what a private contract
cannot manufacture for a person who never signed.

## What can a shareholders agreement not do?

**It cannot make the company do something the Act forbids.** Section 32(2) makes a
constitutional provision ineffective to the extent it contravenes or is inconsistent with
the Act. An agreement has no better standing — a company cannot validly promise to breach
a statute, and under the Contracts Act 1950 an agreement with an unlawful object is void
(ss.24–25).

**It cannot fetter the exercise of a statutory power by the company or the board.** The
directors' duty under the Act runs to the company. An agreement between shareholders that
purports to direct how directors will vote in board meetings is, at best, a personal
covenant among the shareholders — and s.217 makes a nominee director's duty to the company
paramount over the interests of the person who appointed them.

**It cannot create share rights.** This is the most common structural error.

- Section 72(1): a company may issue preference shares **subject to its constitution**.
- Section 90(4): no company shall allot preference shares, or convert issued shares into
  preference shares, **unless provided by the constitution**, and the constitution must set
  out the rights on repayment of capital, participation in surplus assets and profits,
  cumulative or non-cumulative dividends, and voting.
- Section 90(1): a company with different classes of shares must state prominently **in its
  constitution** that the capital is divided into classes, and the voting rights of each.
- Section 90(2): a non-voting class must carry the word "non-voting" in its descriptive
  title and on certificates, prospectuses and directors' reports.

A term sheet that promises an investor 1x non-participating preference is a promise to
adopt or amend a constitution. Without that step there are no preference shares, only
ordinary shares and a contractual grievance.

**It cannot restrict share transfers in a way the board must enforce.** Section 42(2)
requires a private company to restrict transfer of its shares, but the Act does not supply
the mechanism. The board's power to refuse to enter a transferee in the register sits in
s.106, and s.106(1) gives it thirty days, with a three-limb test: an express power to
refuse, a directors' resolution within the same thirty days giving reasons in full, and
notice to both transferor and transferee within seven days. The express power has to be in
the constitution. Drag-along, tag-along and rights of first refusal have no statutory
default at all — s.85 pre-emption applies to **new issues only**, and is itself subject to
the constitution.

**It cannot bind a public company on director removal.** Section 206(2) permits removal by
ordinary resolution "notwithstanding anything in the constitution or any agreement between
a public company and a director". For a private company s.206(1)(a) is different — removal
is by ordinary resolution **subject to the constitution** — so entrenchment is possible,
but only in the constitution.

## Where does s.346 come in?

Section 346(1) lets any member or debenture holder apply to the Court on either of two
grounds:

- that the affairs of the company are being conducted, or the directors' powers exercised,
  in a manner **oppressive** to one or more members or debenture holders, or in **disregard
  of their interests** as members, shareholders or debenture holders; or
- that some act of the company has been done or is threatened, or some resolution has been
  passed or proposed, which **unfairly discriminates against or is otherwise prejudicial
  to** one or more of them.

Note the width. It is not confined to unlawful conduct. "Disregard of interests" reaches
conduct that is technically within power — the perpetual no-dividend policy, the founder
salary that absorbs the profit, the systematic exclusion from information.

If a ground is made out, s.346(2) gives the Court an open remedial power to make such
order as it thinks fit, including:

- directing or prohibiting any act, or cancelling or varying any transaction or resolution;
- regulating the conduct of the company's affairs in future;
- **ordering a purchase of the applicant's shares** by other members or by the company
  itself;
- providing for a corresponding reduction of capital on a company buyback; or
- ordering that the company be wound up.

Two mechanical points nobody mentions. Section 346(4) provides that where the order alters
the constitution, the company cannot make a further inconsistent alteration without leave
of the Court. And s.346(5) requires the applicant to lodge an office copy of the order with
the Registrar **within fourteen days**.

The buyout order is the reason s.346 shapes shareholders agreements even when nobody
litigates. A well-drafted exit mechanism — a valuation formula, a shoot-out, a put option
on defined trigger events — is an attempt to give the parties a private version of what
s.346(2)(c) would give them publicly, faster and without proving oppression.

What the agreement cannot do is exclude the section. A clause purporting to waive s.346
would also collide with s.29 of the Contracts Act 1950, which voids agreements restricting
a party absolutely from enforcing its rights by the usual legal proceedings.

## And the derivative action

Section 346 protects the member. Section 347 protects the **company**, and it is easy to
plead the wrong one.

A complainant may, with the leave of the Court, bring, intervene in or defend proceedings
on the company's behalf, in the company's name — and s.347(3) abrogates the common law
derivative action entirely, so the statutory route is the only route. Section 348 sets the
clocks: **thirty days' written notice** to the directors of the intention to apply for
leave, and, once leave is granted, proceedings must be initiated **within thirty days**.
Section 349 makes clear that ratification by the members does not by itself defeat the
action.

## What belongs in which document

| Term | Constitution | Agreement |
| --- | --- | --- |
| Share classes, preference and voting rights | Required — ss.72(1), 90 | Describe only |
| Transfer restrictions and board refusal power | Required — ss.42(2), 106 | Mirror, with a deed of adherence |
| Pre-emption on new issues | Modifies the s.85 default | Can add contractual commitments |
| Entrenching a director (private company) | Required — s.206(1)(a) | Cannot achieve alone |
| Quorum and board composition | Modifies the Third Schedule default | Voting covenants only |
| Reserved matters and vetoes | Possible, and effective against the company | Common, but binds parties only |
| Funding commitments, warranties, non-solicitation | No | Yes |
| Valuation formula and exit mechanics | Rarely | Yes |
| Confidential commercial terms | No — it is public | Yes |

## Common mistakes

**Adopting no constitution and relying on the agreement.** The company then runs on
statutory defaults that the agreement cannot alter — including full s.85 pre-emption on
issues, no transfer restriction machinery, and removal of any director by simple majority.

**Signing the company as a party and assuming that binds it.** It binds the company as a
contracting party only, and it cannot commit the company to exercise statutory powers in a
fixed way. Where the company must be constrained, amend the constitution.

**Promising preference shares in a term sheet.** Without a constitutional provision under
ss.72(1) and 90(4) they cannot be allotted at all.

**Forgetting the deed of adherence, then discovering the buyer is not bound.** The board's
power to refuse registration under s.106 is the enforcement point, and it must be in the
constitution.

**Treating a 75% shareholder as safe.** Seventy-five per cent carries a special resolution
under s.292 and can amend the constitution under s.36. It does not immunise the holder
against s.346, which asks how the affairs are conducted, not whether the votes were
counted correctly.

**Drafting a post-exit non-compete into the agreement.** Section 28 of the Contracts Act
1950 voids agreements restraining a lawful trade, with exceptions only for the sale of
goodwill and for partners. A shareholder who is not a partner and is not selling goodwill
is outside all three.

## What's next

Read the constitution question first — if there is no constitution, the statutory default
is what actually governs your company today. If the relationship has already broken down,
the practical decision is between an s.346 petition, an s.347 derivative action and a
negotiated buyout, and those three have very different evidence requirements. And check
where the agreement sends disputes: an arbitration clause changes the forum but not the
availability of the statutory remedies.

## Sources

- Companies Act 2016 (Act 777), reprint as at 1 August 2022 — https://www.ssm.com.my/Pages/Legal_Framework/Document/Companies%20Act%202016_Akta%20777_BI%20(1.8.2022).pdf (SSM)
- Companies Act 2016 (Act 777), AGC updated text — https://lom.agc.gov.my/act-detail.php?act=777 (Attorney General's Chambers of Malaysia)
- Contracts Act 1950 (Act 136), updated text — https://lom.agc.gov.my/ilims/upload/portal/akta/LOM/EN/Act%20136.pdf (Attorney General's Chambers of Malaysia)
- Companies Act 2016 — legal framework — https://www.ssm.com.my/Pages/Legal_Framework/Companies-Act-2016.aspx (SSM)

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