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Aspect | Shareholders’ Agreement | Constitution |
Legal Binding | Only between shareholders who signed | Legally binds company, directors, and all shareholders |
Public vs. Private | Private, not required to be lodged with SSM | Public, accessible under SSM |
Flexibility | Can be changed by agreement of signing parties | Requires special resolution (75% shareholder approval) |
Control over Directors | Can include additional restrictions on director decisions | Define director roles, powers, and decision-making rules |
Exit Strategy & Dispute Resolution | Can outline share transfer restrictions and dispute resolution | Limited coverage in the absence of an SHA |
✅ You don’t necessarily need a Constitution if your SHA already covers everything you need.
✅ But having both can provide stronger governance and protection, as the Constitution applies to all shareholders (current and future).
If your company was incorporated without a Constitution, then it follows the default rules under the Companies Act 2016. If you need more customized governance, adopting a Constitution might be beneficial.
If your company has preference shareholders, having a Company Constitution can provide stronger protection and clarify compared to relying solely on a Shareholders’ Agreement (SHA) or the default rules under the Companies Act 2016 (Malaysia). Here’s why a Constitution is beneficial for Preference Shareholders:
1. Legally Binding on All Shareholders (Including Future Ones)
2. Clear Definition of Preference Share Rights
🛑 Without a Constitution, preference shares might be subject to uncertain treatment under the Companies Act 2016.
3. Share Transfer & Exit Strategy
📌Without a Constitution, the rules on transferring or redeeming preference shares may not be as clear.
4. Protection Against Dilution
🔍 Why does this matter?
5. Priority on Dividends & Payments
💰 Example:
6. Clarify in Decision-Making & Voting Rights
📌 Without a Constitution, preference shareholders may have limited say in key decisions.
7. Flexibility in Customizing Share Classes
🛑 Without a Constitution, these rights may not be fully enforceable.
Conclusion: Do You Need a Constitution for Preference Shareholders?
✅ YES, if you want to:
✔ Ensure preference shareholders’ rights are recognized under company law.
✔ Define clear dividend rights and priority in liquidation.
✔ Restrict share transfers and prevent dilution.
✔ Provide certainly for new and existing shareholders.
✔ Strengthen investor confidence.
❌ Maybe NOT, if:
If you’re raising capital or already have preference shareholders, having both a Constitution and a Shareholders’ Agreement is the best combination for strong governance.
Yes, there can be potential issues if you highlight preference shareholder rights only in the Shareholders’ Agreement (SHA) without aligning them with the Companies Act 2016 (CA 2016) or Company Constitution.
Here’s what you need to be aware of:
💡 Solution:
💡 Solution:
💡 Solution:
💡 Solution:
There are several provisions in CA 2016 that override any private agreement, including an SHA. Some key examples:
Issue | SHA Clause | Potential Problem |
Dividends | Guarantee dividends to preference shareholders, even in a loss-making year | CA 2016 only allows dividend if the company has profits. Any agreement contradicting this is void. |
Voting Rights | Completely removes voting rights of preference shareholders | CA 2016 gives certain rights to all shareholders (e.g., winding up resolutions). |
Share Transfers | Requires board approval before transferring shares | CA 2016 allows free transfer unless the Constitution says otherwise. |
Redemption of Shares | Requires the company to buy back preference shares anytime | CA 2016 imposes conditions on share buybacks, including solvency tests. |
✅ Step 1: Put Key Rights in the Constitution
✅ Step 2: Ensure SHA & Constitution Align
✅ Step 3: Follow CA 2016 in Key Areas
✅ Step 4: Review & Update Regularly
Here’s a simple table to explain the relationship between CA 2016 vs. Company Constitution and why having a Constitution can still be beneficial for you
Aspect | Companies Act 2016 (CA 2016) | Company Constitution |
Which comes first? | CA 2016 always takes priority | Must comply with CA 2016 but allow customization |
Legally Required? | No, Constitution is optional | Not mandatory, but useful for clarify and governance |
Who does it apply to? | All companies in Malaysia | Only applies to the specific company that adopts it |
Enforceability | Automatically applies by law | Binding on the company, directors, and shareholders |
Can override CA 2016? | ❌ No | ❌ No, but can provide more detailed rules |
Why have it? | Sets out default company rules | Helps customize company governance and structure |
Best for? | Small businesses that follow default CA 2016 rules | Companies needing clear governance, investor protection and custom rights |
Key Area | CA 2016 (Default Rules) | With a Company Constitution |
Director Powers & Roles | Basic rules on director duties and decisions | Can customize director powers, decision-making rules, and restrictions |
Shareholder Rights | All shareholders have basic voting and dividend rights | Can define different rights for preference shareholders, dividend priority, etc. |
Voting Rights | Standard 1 share = 1 vote | Can set different voting rights (e.g., preference shareholders with limited voting) |
Dividends | Can only be paid if there are profits | Can specify how and when preference shareholders receive dividends |
Share Transfers | Shares can be freely transferred unless restricted | Can limit share transfers to prevent external investors from taking control |
Dispute Resolution | CA 2016 has no standard dispute resolution | Can include mediation/ arbitration rules for resolving shareholder disputes |
Company Exit & Liquidation | Follows CA 2016’s winding-up process | Can prioritize preference shareholders for payout in liquidation |
✅ CA 2016 applies to all companies, but it has basic default rules.
✅ A Company Constitution is optional but useful for companies wanting clear governance and investor protections.
✅ Having a Constitution helps prevent shareholder conflicts and ensures company rules are clear for all.
A Company Constitution is recommended if:
✅ The company has multiple shareholders and needs clear rules on shareholding rights.
✅ The company wants to customize director powers, decision-making and share transfers.
✅ The company has preference shareholders and need to protect their rights (dividends, voting, and exit).
✅ The company needs a clear framework for resolving disputes and avoiding legal uncertainty.
If you are unsure, default CA 2016 rules may be enough for simple companies. But for growth-stage businesses, startups with investors, or companies raising funds, a Company Constitution provides extra protection.
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