When you become a shareholder in a Malaysian private company, you might assume you can sell your shares to anyone at any time. However, most private companies have share transfer restrictions built into their constitution — and understanding these restrictions is crucial before you buy or sell shares.
One of the most common and important restrictions is the pre-emption right. This article explains what pre-emption rights are, how they work under Malaysian law, and what shareholders and directors need to know.
What Are Pre-Emption Rights?
Pre-emption rights (also called "rights of first refusal") give existing shareholders the first opportunity to purchase shares before they can be sold to an outside party. Think of it as a "first dibs" mechanism that protects the ownership structure of a company.
Under Section 105 of the Companies Act 2016, a private company is required to restrict the right to transfer its shares. This is one of the key characteristics that distinguishes a private company (Sdn Bhd) from a public company (Berhad) in Malaysia.
Why Do Pre-Emption Rights Exist?
Pre-emption rights serve several important purposes:
Maintaining control: Existing shareholders can prevent unwanted third parties from acquiring shares and potentially disrupting the company's direction or management.
Preserving ownership proportions: Shareholders can maintain their percentage of ownership by purchasing shares proportionally when another shareholder exits.
Protecting company culture: Particularly in family businesses or closely-held companies, pre-emption rights help ensure new shareholders align with existing values and objectives.
Preventing hostile takeovers: These restrictions make it difficult for outside parties to accumulate shares without the consent of existing stakeholders.
How Pre-Emption Rights Work in Practice
The specific mechanics of pre-emption rights depend on what is stated in the company's constitution. However, a typical pre-emption clause works as follows:
Step 1: Notice of Intention to Transfer
A shareholder wishing to sell their shares must first notify the company's directors or company secretary in writing. This notice typically includes the number of shares to be sold, the proposed price, and the intended buyer (if known).
Step 2: Offer to Existing Shareholders
The company must then offer those shares to existing shareholders, usually in proportion to their current shareholdings. For example, if you own 30% of the company, you would be entitled to purchase 30% of the shares being sold.
Step 3: Acceptance Period
Existing shareholders are given a specified period (commonly 14 to 30 days) to decide whether they want to purchase the offered shares. The constitution should clearly state this timeframe.
Step 4: Determination of Price
If the constitution does not specify a pricing mechanism, disputes can arise. Common methods include:
• Fair market value determined by an independent valuer
• Formula-based pricing tied to net asset value or earnings
• Agreed price between the transferring shareholder and the company
• Price offered by the third-party buyer
Step 5: Transfer to Third Party
Only if existing shareholders decline to purchase (or fail to respond within the stipulated period) can the shares be transferred to the proposed outside buyer — and usually only at a price not lower than what was offered to existing shareholders.
Directors' Discretion to Refuse Registration
Beyond pre-emption rights, Section 105 of the Companies Act 2016 also allows a private company's constitution to give directors the discretion to refuse to register a transfer of shares. This is a separate but related restriction.
However, this power must be exercised in good faith and in the best interests of the company. Directors cannot arbitrarily refuse a transfer without valid reasons, as this could expose them to legal challenges.
What Happens If Pre-Emption Rights Are Breached?
If a shareholder transfers shares without following the pre-emption procedure:
The transfer may be void: The company can refuse to register the transfer, meaning the buyer does not become a legal shareholder.
Legal action: Other shareholders may seek court intervention to enforce their pre-emption rights or claim damages.
Relationship breakdown: Even if technically resolved, breaching these rights often damages trust among shareholders and can lead to prolonged disputes.
Practical Tips for Shareholders and Directors
For Shareholders Looking to Sell
Review the constitution first: Before negotiating with any buyer, understand exactly what restrictions apply to your shares. Request a copy of the company's constitution from the company secretary.
Follow the procedure strictly: Document every step. Send notices in writing, keep copies, and adhere to all timeframes.
Get professional advice: Share transfers involve legal, tax, and commercial considerations. Engage a lawyer and accountant before proceeding.
For Existing Shareholders
Monitor transfer notices: Ensure the company has a system to promptly notify you when shares become available.
Act within the deadline: If you want to exercise your pre-emption rights, respond within the stipulated period. Silence is usually treated as declining the offer.
Have financing ready: Pre-emption rights are only valuable if you can afford to exercise them. Consider how you would fund a share purchase if the opportunity arises.
For Directors
Ensure compliance: When processing share transfers, verify that all pre-emption procedures have been followed before registering the transfer.
Document decisions: If exercising discretion to approve or refuse a transfer, record the reasons in board minutes.
Seek legal advice for disputes: Share transfer disputes can be complex. Get professional guidance before making decisions that could be challenged.
Can Pre-Emption Rights Be Waived?
Yes, in most cases. Shareholders entitled to pre-emption rights can waive them, allowing a direct transfer to a third party. This waiver should be in writing and clearly documented. Some constitutions may require all shareholders to consent to such a waiver, while others may only require consent from those whose rights are affected.
Shareholders' Agreements vs Constitution
Many private companies also have shareholders' agreements that contain additional or different pre-emption provisions. Where there is a conflict between the shareholders' agreement and the constitution, legal advice should be sought to determine which takes precedence in the specific circumstances.
It is generally advisable to ensure both documents are aligned to avoid confusion and disputes.
Key Takeaways
Pre-emption rights are a fundamental feature of Malaysian private companies, designed to protect existing shareholders and maintain the integrity of the company's ownership structure. Whether you are planning to sell shares, considering purchasing shares in a private company, or serving as a director, understanding these restrictions is essential.
Always review the company's constitution carefully, follow prescribed procedures meticulously, and seek professional advice when in doubt.
Disclaimer: This article is intended for general informational and educational purposes only. It does not constitute legal advice and should not be relied upon as such. The information provided may not reflect the most current legal developments and may not apply to your specific circumstances. For advice on your particular situation, please consult a qualified lawyer. No solicitor-client relationship is created by reading this article.