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

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.