1.

0 DEFINITION OF SHAREHOLDERS’ AGREEMENT AND CONSTITUTION

1.1 Definition of Constitution

Under the Companies Act 1965, every company was required to have a memorandum
and articles of association. The memorandum and articles of association are now
collectively known as the constitution, and it is expressly stated in section 31 and section
38 Companies Act 2016 that only a company limited by guarantee shall have a
constitution. Other types of company may or may not have a constitution and it is optional
for them.

1.2Definition of Shareholders’ Agreements

A shareholder agreement is typically an agreement drawn up between some or all of a

corporation’s shareholders. It is an arrangement whereby a company's shareholders describe the
way in which the company has to be operated along with the rights and obligations of the
shareholders. Included also is any information concerning regulations about the management of
the company, the shareholders' relationship, the ownership of shares, and the protection and
privileges of shareholders.

Basically the shareholder agreement’s intention is to ensure that all the rights of the shareholders
are protected and they are treated fairly at all times. It also gives shareholders the right to make
decisions in relation to those outside parties who may wish to become shareholders in the future
and offers safeguards for those who are minority shareholders. Including minority shareholders’
rights is not a compulsory part of a shareholder agreement, but it can be included.

Two or more shareholders can draw up an agreement presented in writing as long as the
shareholders exercise the voting rights they have in relation to their shares as laid down in the
agreement. An example of the use of an agreement could be when two or more minority
shareholders of the corporation come to an agreement to vote together on director appointments
so that their voting power as a collective is stronger than if they voted individually.

In private corporations that have multiple shareholders, the shareholders of such corporations will
usually agree, in writing, to a shareholder agreement. Any written agreement drawn up by all the
corporation’s shareholders may add restrictions to some extent as to the directors’ powers to
supervise or manage the business and the corporation’s affairs.

2.0 LAW AND ENFORCEMENT OF THE CONSTITUTION

If a company has no constitution, the company, each director and each member of the company
shall have the rights, powers, duties and obligations as set out in the Act. And ‘if the company has
a constitution, the company, each director and each member of the company shall also have the
rights, powers, duties and obligations as set out in the Act, except to the extent that such rights,
powers, duties and obligations are permitted to be modified in accordance with this Act, and are
so modified by the constitution of the company’ under section 31(2) of the Companies Act 2016
(CA 2016).

In other words, the rights, powers, duties and obligations of the company, director and member
are prescribed by the CA 2016 unless modified by the company’s constitution. The company’s
constitution can modify any of those rights, powers, duties and obligations only if the Act permits
it.

For companies which were registered prior to the coming into operation of the CA 2016, section
619(3) provides that the memorandum and articles of association of a company existing before the
operation of the Act shall have effect as if made or adopted under the Act unless otherwise resolved
by the company. Thus, a company’s existing memorandum and articles shall form the company’s
constitution until the company alters it by passing a special resolution.

3.0 LAW AND ENFORCEMENT OF THE SHAREHOLDERS’ AGREEMENT

3.1 Purpose of Shareholders’ Agreements

In Malaysia, minority shareholders usually request a shareholders’ agreement so that they

can ensure that their rights are protected upfront. Shareholders’ agreements tend to have a
variety of purposes that include: outlining the objectives of the business and its business
plan; regulating election of directors; determining the quorum or special majorities for
certain decisions; establishing specific obligations of certain members such as providing
technical assistance, contributing trademarks, or contributing business or political
influence; transfer provisions; and any other provisions which may dilute or prejudice the
minority shareholder’s rights.

3.2Protection of Minority Shareholders in the Shareholders’ Agreements

A minority shareholder’s rights should be included in a shareholder agreement and could

include the declaring of fraud or a derivative action in the minority. These can both
effectively block a buyout completion. When the minority shareholders think the buyout is
not fair and want to withdraw their shares from the business, they are able to exercise their
appraisal rights. This gives the court the right to decide if the share price offered is fair and
gives the option to compel the business initiating the buyout to pay a specified price if
required.

In Malaysia to ensure minority shareholder control by means of a shareholders’ agreement

it could be by way of management control, board of directors’ control or otherwise. For
instance, such shareholders’ agreement may stipulate a list of reserved matters that require
a unanimous decision at the shareholders’ or board meeting. There are of course, other
arrangements such as exit arrangements for disgruntled shareholders and protection
mechanism in the event of the third party offer to take over the company and so on.

3.3Formalities for Shareholders’ Agreements to Comply with Malaysian Law

Generally, there are no formalities required for shareholders agreements in Malaysia save
for the application of general law and the requirements for limited companies in Malaysia
such as par value for shares. However, at least two directors must reside in Malaysia.

Secondly, the shareholders’ agreement must be stamped under the Stamp Act 1949 for it
to be valid and enforceable, within 30 days of its execution if executed within Malaysia, or
within 30 days after it has first been received in Malaysia, if it was executed abroad under
Section 47 of the Stamp Act 1949.
The execution of a shareholders' agreement requires a timely and accurate disclosure to the
public and relevant stock exchanges if the execution of the agreement is with a Malaysian
public listed company pursuant to chapter 10 of the Bursa Malaysia Listing Requirements.

3.4 Bylaws that governed Shareholders’ Agreements

In Malaysia, such bylaws are known as Memorandum & Articles of Association (M&A).
The great majority of companies in Malaysia adopt a standard format with customisations.
Public listed companies must also abide by the Bursa Listing Requirements regarding the
M&A.

One example is the composition of the board of directors and rights of board members of
a public listed company. The M&A or the bylaws should contain adequate provision to, for
example to ensure that at least two directors or one third of the board of directors,
whichever is higher, are independent directors. Vacancies in the board of directors must be
filled within three months.

3.5 Common Types of Clauses in Shareholders’ Agreements in Malaysia

3.5.1 Authorised and issued capital

The authorised share capital of the company, the par value of the shares, timing for
the issuance of the shares and agreed issued and paid-up capital.

3.5.2 Business of the company

The strategic business of the company will usually follow the objects stated in
M&A and the agreed business plan which is attached to the shareholders’
agreement.

3.5.3 Directors
Appointment and quorum: in a shareholders’ agreement, the parties are free to
determine the method of and terms under which directors will hold office and so
on.

3.5.4Obligations of parties

This is a clause where shareholders agree and undertake jointly to contribute

towards the success of the company such as the provision of managerial and
technical expertise to the company; introduction of business contacts and
networking; provision of marketing and sales advice; securing of external financing
and so on.

3.5.6 Pre-emption rights

Each shareholder must offer the other shareholders the right to acquire the shares
prior to its sale or disposal of shares to a third party.

3.5.7 Management team

The shareholders normally specify the persons they are entitled to appoint.

3.5.8 Reserve matters

The matters that constitute reserve matters and the level of voting required.

3.5.9 Financing

The preferred mode of financing would usually be stated – equity financing or debt
financing. The shareholders would also state if they agree to provide guarantees or
other financial assistance.

3.5.10 Deadlock

There may be provision for a party to exit after certain disputed events.
 3.5.11 Confidentiality

All shareholders are to keep information confidential.

3.5.12 Dispute resolution

The preferred mode of resolving disputes through mediation, arbitration or courts.

3.5.13 Law

The law of Malaysia and jurisdiction of the Malaysian courts

Therefore the shareholders’ agreement will govern the shareholders’ relationship with one
another but cannot be analysed or interpreted in isolation. The M&A, Companies Act 2016,
the Capital Markets and Securities Act (if applicable), the stock exchange (Bursa)
requirements (if applicable), and common law principles affect the interpretation and
enforceability of the agreement.

4.0 THE DIFFERENCES BETWEEN SHAREHOLDER AGREEMENTS AND

CONSTITUTION

4.1 PARTIES

A company constitution relates to the company, and all relevant parties. This includes the
directors, founders and also the shareholders.

By contrast, a shareholders agreement specifically pertains to the shareholders and the

shareholders exclusively.

4.2 THE BINDINGNESS & APPLICABILITY TOWARD THE PARTY (EFFECT)

Since a Shareholders Agreement is a contract, thus the party are only bound by a contract
if they sign the contract. The new shareholder does not automatically bound to the contract.
Failure to comply will lead to breach of contract. That aggrieved party can apply to sue or
terminate the agreements.

Whereas for constitution, under CA 2016, the constitution which is adopted by company
is binding on the company, its members and its director as according to Section 32(3). This
resolves the uncertainty as to whether these documents also operate to bind its directors,
officers and directors which was not clearly dealt with previous act. Whereas Section 31(2)
and (3) if a company has no constitution, the company, each director and each member of
the company shall have the rights, powers, duties and obligations as set out in this Act.

Apart from that, a constitution automatically applies to shareholders and directors. New
shareholders and directors are automatically bound by the Constitution as according to
Section 33(1) which states the constitution shall, when adopted, bind the company and the
members to the same extent as if the constitution had been signed and sealed by each
member and contained covenants on the part of each member to observe all the provisions
of the constitution.

In another words, constitution has similar effect as a contract between the company,
shareholder, director and company secretary. The provision is to be compiled or a decision
may be voided.

Companies Act 2016 will set out some rules governing the relationship between the
company, its shareholders and directors. Company constitution may be adopted to
exchange the provisions of the Companies Act 2016 that is applicable. If the Companies
Act 2016 is silent on method to for decision making, the company constitution can be used
to fill in the gap.

As an example, the Companies Act 2016 states that issuance of new shares requires an
ordinary resolution, which can be passed through majority vote. Shareholders may use
Company Constitution to override this and state that issuance of new shares must be
decided by unanimous vote.

4.3 REGISTRATION
As according to Section 32(4), when companies adopt constitution, the company shall
register with the Registrar under Companies Act 2016.

Unlike the Company constitution, it does not need to be registered and lodged with the
Registrar under Companies Act 2016.

4.4 THE CONFIDENTIALITY & PRIVATENESS

A shareholders agreement is confidential between the relevant shareholders and the

company, whereas a company’s constitution may be publicly available. Since, the
company’s constitution have to register at Registrar, thus it available for public inspection.

Unlike a company's Constitution, the Shareholders’ Agreement does not need to be filed at
Registrar and therefore, does not have to be made available for public inspection but instead
can remain public.

4.5 AMENDMENTS

Company constitution can be amended so long as the procedures for amending the
company’s constitution have been complied with as according to Section 36 of CA 2016.
Under most circumstances, there is no need to obtain the agreement of all the parties
involved to agree to this but only a requisite majority.

In contrast, all parties to the shareholder agreement must agree for any amendment to the
agreement to take effect.

4.6 BENEFITS

For Company Constitution the benefits and priority is always for the company while for
Shareholder’s agreement the benefit and priority is for shareholders and not for the benefit
of the company.

4.7 LAW GOVERN

For Company constitution, the law that govern it will be company constitution itself but
also Companies Act 2016 will govern it if needed. This is because the Companies Act 2016
 will set out some rules governing the relationship between the company, its shareholders
and directors. Company constitution may be adopted to exchange the provisions of the
Companies Act 2016 that is applicable. If the Companies Act 2016 is silent on method to
for decision making, the company constitution can be used to fill in the gap.

As an example, the Section 206 Companies Act 2016 states that (1) a director may be removed
before the expiration of the director's period of office as follows:

(a) subject to the constitution, in the case of a private company, by ordinary resolution; or
(b) in the case of a public company, in accordance with this section.

(2) Notwithstanding anything in the constitution or any agreement between a public company and
a director, the company may by ordinary resolution at a meeting to remove the director before the
expiration of the director's tenure of office.

Here, the company may use constitution to override this and state that removal of director must
be decided by unanimous vote.

Whereas for Shareholder agreements, A shareholders’ agreement will govern the shareholders’
relationship with one another but cannot be analysed or interpreted in isolation. Companies Act
2016, the Capital Markets and Securities Act (if applicable), the stock exchange (Bursa)
requirements (if applicable), common law principles affect the interpretation and enforceability of
the agreement also contract Act 1957.
5.0 PREVAILITY OF CONSTITUTION OVER SHAREHOLDER AGREEMENT

5.1 MECHANISM OF SHAREHOLDER AGREEMENT AND THE

CONSTITUTION

Both constitution and the shareholder agreement works interrelated with each other.
Companies tend to regards the importance of both agreements to be read together
comprehensively. The significance of both documents shows a resounding importance for
the running of the company. This is because a shareholder agreement is confidential
between the relevant shareholders and the company, whereas a companies constitution may
be publicly available. Furthermore, a shareholder agreement is typically more cost-
effective and easier to enter into as it not require a special resolution to be effective and
enforceable unlike the constitution which is much more complex. Moreover, the
shareholders of a particular class may wish to enter into a private arrangement between
themselves and need a shareholders agreement. The benefits above is among the reasons
why companies tends to incorporate both shareholder agreement and the constitution.

5.2 EFFECT OF COMPANY CONSTITUTION

The company constitution is governed fully under the Companies Act 2016. In accordance
to Section 31(2) of the Companies Act 2016 states that a company that has a constitution
will possess the rights and powers set out in the constitution. However, the power set in the
constitution cannot contravene with the provisions of the Companies Act 2016 as
illustrated in Section 32(2) of Companies Act 2016. The power of the constitution will bind
the company and it will govern the management of the company.
 5.3 POSITION OF SHAREHOLDER AGREEMENT AGAINST
CONSTITUTION

Currently, the shareholder agreement position is not illustrated within the provision of
Companies Act 2016. However, there is a case in common law that illustrates the position
of a shareholder agreement against a constitution. Initially, a shareholders agreements
should always be read in conjunction with the constitution, notwithstanding the
‘inconsistency clause’.

The ‘inconsistency clause’ often found in shareholders agreements plays a key role in
settling internal company disputes. Where an inconsistency exists between a shareholders
agreement (“SA”) and a company constitution, an inconsistency clause within the
shareholder agreement will generally state that the shareholder agreement prevails.
Consequently, a common assumption exists that where an internal company dispute arises
the shareholder agreement will always prevail. However, the decision of Cody v Live
Board Holdings Ltd by the New South Wales Supreme Court has highlighted a flaw in this
assumption and has underlined the dangers of reading the shareholder agreement to the
exclusion of the constitution.

According to the case of Cody v Live Board Holdings Ltd, Directors of the defendant
company, Live Board Holdings Ltd (“LBH”) sought to raise capital by issuing preference
shares to new shareholders. A dispute arose between an existing shareholder (the plaintiff)
and the company regarding the validity of the share issue. Both the shareholder agreement
and the LBH constitution contained provisions regarding the power of the directors to issue
shares.

Within the shareholder agreement, the LBH shareholders agreement reserved for the
shareholders the general power to issue shares. Where a decision by the Board was made
to issue shares, the SA stated that the issue required approval by a simple majority of
shareholders.

In comparison with the constitution, consistent with the shareholder agreement; the LBH
constitution stated that the Board could cause the company to issue shares. However, the
constitution further stated that where an issue of shares affected the rights of existing
shareholders, it required approval by a special resolution.

The dispute arose to whether or not the shareholder agreement or constitution applied. Both
parties acknowledged that the Board had the power to issue shares, however the arguments
put forward by the plaintiff and defendant both sought to establish that different provisions
of either the shareholder agreement or LBH constitution prevailed regarding the issue of
shares. The defendants relied on the inconsistency clause to argue that the shareholder
agreement prevailed and permitted the issues of shares without the special resolution. The
plaintiff submitted that the constitution clause was not superseded by the clauses in the
shareholder agreement.

As a result of s198A Corporations Act 2001 (the “Act”) and the SA, acknowledging that
an issue of shares and variation of shareholder rights was a decision to be made by the
board, the inconsistency regarded the type of majority required for a Board decision
regarding shares to be approved. It was either to be a special majority (75% shareholder
approval) as stated in the company constitution, or a simple majority (50%), allowed by
the shareholder agreement.

The Court held that no inconsistency existed, and the inconsistency provision in the
shareholder agreement was not enlivened. The LBH constitution prevailed and a special
majority was held to be required to issue preference shares. In coming to its decision, the
Court looked to the purpose for which each provision had been drafted. Firstly, clause 6 of
LBH constitution existed to protect the rights of its existing shareholders. Brereton J held
that by issuing preference shares only to new shareholders, LBH had indirectly varied the
rights of existing shareholders by issuing shares that would rank ahead of their interest. As
such, clause 6 of the constitution directly applied – LBH could not validly issue preference
shares unless passed by special majority. The provision in shareholder agreement existed
simply to reserve the power to issue shares to the shareholders. Brereton J held that the
shareholder agreement provision was therefore not inconsistent with clause 6 of the
constitution and therefore, approval of the issuing of preference shares by special majority
was consistent. Brereton J ultimately held that the combined effect of the shareholder
agreement and constitution was that, in ordinary circumstances, shareholders had the power
to approve the issue of shares by simple majority. However, where the issuing of shares
would affect the rights of existing shareholders, a special majority would be required.

The end result would be the company directors should be aware that the shareholder
agreement and company constitution should be read in conjunction, not in isolation. The
judgment of the Court makes it clear that one instrument can serve as a guide for
interpretation of the other and a purposive approach should be taken in resolving any
potential inconsistencies. The judgment highlights the pitfalls associated with relying too
heavily on inconsistency provisions.
5.4 PREVAILITY OF CONSTITUTION OR SHAREHOLDER AGREEMENT

Generally, there is no specific provision to the position of both the constitution and the
shareholder agreement in situation of inconsistency. However, in accordance to the
Companies Act 2016 as stated above the constitution is clearly binding over the company.
Therefore, we conclude that according to Malaysian law generally that the constitution
would prevail over the shareholder agreement.

Nevertheless in common law case as illustrated above, there is a different position when
there is an existence of an inconsistency clause. Shareholders agreements should be read
in conjunction with the company constitution, even when an ‘inconsistency clause’ exists.
When it is deemed inconsistency then the shareholder agreement shall prevail according to
the common law decision in the case of Cody v Live Board Holdings Ltd [2014] NSWSC
78.

Hence, we believe that the constitution would prevail over the shareholder agreement
according to Malaysian Law.