Share Purchase Agreement in Malaysia: A Comprehensive Guide

Share Purchase Agreement in Malaysia: A Comprehensive Guide

1. General Understanding

1.1 What is a Share Purchase Agreement and Why is it Important?

A Share Purchase Agreement (SPA) is a legally binding contract between a seller and a buyer setting out the terms under which the buyer acquires shares in a company. In Malaysia, an SPA is more than a formality. It is the roadmap of the transaction that ensures both parties have a clear understanding of the deal, from price and payment terms to legal protections. Without it, you risk ambiguity, misunderstandings, and potential disputes that could lead to costly litigation.

For example, if you buy 40% of a company without an SPA, you may later discover the company has undisclosed debts or that the seller retained rights they never disclosed. An SPA provides a legal safety net that can protect you from such situations.

1.2 How is a Share Purchase Agreement Different from a Shareholders’ Agreement?

While both documents involve company shares, they serve different purposes. The SPA is transaction-focused. It governs the sale and purchase itself, setting out the terms of transfer. The Shareholders’ Agreement is relationship-focused. It governs how shareholders interact with one another after the sale has been completed, covering matters such as voting rights, dividend policy, and exit terms.

A common mistake is to think that having one makes the other unnecessary. In reality, both documents often work together. The SPA completes the transaction, while the Shareholders’ Agreement manages the ongoing relationship.

1.3 What is the Difference Between a Share Sale Agreement and a Share Purchase Agreement?

In Malaysian practice, the terms are often used interchangeably, but technically they reflect different perspectives. A Share Purchase Agreement is framed from the buyer’s perspective, while a Share Sale Agreement is from the seller’s perspective. In most cases, corporate lawyers merge both perspectives into a single agreement to cover obligations for both sides. Whether you call it a share sale or share purchase agreement, what matters is that it is comprehensive and binding.

1.4 When is a Share Purchase Agreement Required in Malaysia?

An SPA becomes essential whenever shares are transferred in circumstances involving significant value, complex terms, regulatory requirements, or when the buyer and seller are not personally known to each other. It is particularly critical when third-party financing, staged payments, or conditions precedent are involved. In small, informal transactions, parties sometimes rely on the statutory share transfer forms alone, but this exposes them to unnecessary risk.

1.5 Is a Share Purchase Agreement Legally Required Under the Companies Act 2016?

The Companies Act 2016 does not specifically require a written SPA. However, it does require proper documentation for share transfers and company register updates. From a risk management standpoint, experienced corporate lawyers will always recommend a written SPA. This ensures enforceability in court and provides evidence of the agreed terms.

1.6 Can I Buy or Sell Shares Without a Written Agreement?

It is possible to complete a share transfer using only the statutory share transfer form, but doing so without an SPA is strongly discouraged. Without written terms, it becomes extremely difficult to prove what was agreed, particularly regarding warranties, liabilities, and payment terms. In high-value deals, this is an open invitation to disputes.

2. Scope and Key Clauses

2.1 What are the Essential Clauses in a Share Purchase Agreement?

A well-drafted SPA in Malaysia will typically include clauses on:

• Purchase price and payment structure

• Conditions precedent and completion terms

• Warranties and indemnities from the seller

• Confidentiality and non-compete provisions

• Governing law and dispute resolution mechanisms

Each clause serves a strategic purpose. For example, warranties allow the buyer to rely on specific representations about the company’s financial health, while indemnities ensure the seller compensates the buyer if those warranties turn out to be false.

2.2 What is the Difference Between Completion Date and Signing Date?

The signing date is when the SPA is formally executed by both parties. The completion date is when the actual transfer of shares and payment occurs. In straightforward deals, these dates may be the same. In more complex transactions, completion may take place weeks or months after signing, once all conditions precedent have been fulfilled.

2.3 What are Warranties and Indemnities, and Why Do They Matter?

Warranties are factual statements by the seller about the company, such as confirming that the financial statements are accurate or that there are no pending lawsuits. Indemnities are promises to cover specific losses if certain events occur, such as undisclosed tax liabilities. Together, they are the buyer’s primary form of protection against hidden risks.

2.4 What is a Condition Precedent in a Share Purchase Agreement?

Conditions precedent are requirements that must be satisfied before the transaction can complete. Examples include regulatory approvals, shareholder consents, or repayment of debts. If these conditions are not met, the buyer is not obliged to proceed.

2.5 What Does Completion Deliverables Mean in a Share Purchase Agreement?

These are the items to be provided at completion, such as share transfer forms, new share certificates, updated registers of members, and board resolutions approving the transfer. Without proper completion deliverables, the transfer may be invalid or incomplete under Malaysian law.

3. Purchase Price and Payment Terms

3.1 How is the Purchase Price for Shares Determined?

The price is typically negotiated based on valuation methods such as net asset value, earnings multiples, or discounted cash flow analysis. Strategic factors, like control premiums or synergies with the buyer’s existing business, may also influence the price.

3.2 What is the Difference Between Fixed Price and Price Adjustment Clauses?

A fixed price is agreed upon at signing and does not change. A price adjustment clause allows the price to change post-completion based on actual performance or working capital levels. For example, if the target company’s debt is higher than expected, the purchase price may be reduced accordingly.

3.3 What is an Earn-Out Arrangement?

An earn-out is where part of the purchase price is contingent upon the company achieving specific performance targets after completion. This is common when the seller remains involved in the business post-sale. There are many other payment structures that can be considered.

3.4 Can I Pay for Shares in Instalments?

Yes, instalment payments can be agreed upon, but the SPA should detail payment dates, interest (if any), and consequences of late payment. Security measures, such as share pledges, may be included.

3.5 How are Purchase Price Adjustments Made After Completion?

Post-completion adjustments are usually based on audited accounts or agreed calculations prepared after closing. The SPA will set out how and when these adjustments are calculated and paid.

4. Due Diligence

4.1 Do I Need to Do Due Diligence Before Signing the Agreement?

Yes. Due diligence is not optional if you are serious about protecting your investment. In Malaysia, due diligence typically covers legal, financial, tax, and operational aspects of the company. This due diligence process helps the buyer verify the accuracy of the seller’s claims, identify hidden liabilities, and assess whether the purchase price is justified. Skipping due diligence may save time in the short term but can lead to catastrophic losses if significant issues emerge later.

4.2 What Happens if Due Diligence Reveals Issues in the Company?

If the due diligence investigation uncovers red flags and risk concerns such as pending lawsuits, unpaid taxes, or overstated assets, the buyer has options. These include renegotiating the purchase price, demanding additional warranties, or requiring indemnities. In some cases, buyers insist on retention sums, holding back part of the purchase price until the risk is resolved.

4.3 Can I Still Walk Away After Signing if I Find New Problems?

This depends entirely on the terms of the SPA. If the agreement includes a material adverse change clause or conditions precedent that remain unsatisfied, you may have a contractual right to withdraw. Without such clauses, your ability to walk away will be severely limited, and you could face breach of contract claims.

5. Legal and Regulatory Compliance

5.1 Do I Need Approval from the Companies Commission of Malaysia (SSM)?

For private companies, SSM approval is generally not required before transferring shares. However, the company must update its register of members and file the relevant forms with SSM within a prescribed period after completion. For certain industries, such as banking or telecommunications, approvals from sector regulators may also be required.

5.2 Are There Tax Implications for Buying or Selling Shares?

Yes, there are, especially since the introduction of Capital Gains Tax (CGT) effective from 1 January 2024. A qualified but often misunderstood nuance:

Under the Income Tax Act 1967, effective from 1 January 2024, gains from the disposal of unlisted shares or shares in foreign-controlled companies with Malaysian real property exposure are subject to CGT for entities such as companies, LLPs, trusts, and cooperatives, but not for individuals.

The tax rate is generally 10 percent of the net gain (chargeable income). As an alternative for shares acquired before 1 January 2024, disposers may opt to pay 2 percent of the gross disposal price.

Real Property Gains Tax (RPGT) no longer applies to such share disposals by entities subject to CGT. Individuals remain exempt from CGT. Their share disposals, unless involving real property, are not subject to either CGT or RPGT.

5.3 Is Stamp Duty Payable on a Share Purchase Agreement?

Yes. In Malaysia, stamp duty for acquiring shares is payable on the instrument of transfer of shares, not just the SPA itself. The rate is currently 0.3 percent of the consideration paid or the market value of the shares, whichever is higher. This valuation is assessed by the Inland Revenue Board (LHDN).

The obligation to pay stamp duty typically falls on the buyer, but this can be negotiated. In high-value transactions, stamp duty can be a substantial cost, so it is essential to factor this into your deal planning. Delays in paying stamp duty can result in penalties, which increase over time.

If the company is asset-heavy, the market value could be significantly higher than the purchase price you negotiated. This means your stamp duty could be calculated on a value you never actually paid, making pre-deal valuation checks critical.

5.4 Do Foreign Buyers Need Special Approval to Purchase Shares in a Malaysian Company?

Foreign buyers may face additional layers of approval depending on the industry and company structure. For most private limited companies, the Companies Act 2016 does not impose blanket restrictions on foreign ownership. However:

• Sectoral regulations: Industries like telecommunications, oil and gas, and financial services often have foreign equity caps or require ministry-level approvals.

• Guidelines on Foreign Participation in the Distributive Trade Services: These guidelines impose conditions for foreign investment in retail, wholesale, and distributive trade.

• Economic Planning Unit (EPU) approvals: Large acquisitions involving strategic industries or Bumiputera ownership may require EPU clearance.

• Bank Negara Malaysia compliance: All cross-border payments and share transfers involving foreign entities must comply with foreign exchange administration rules.

Regulatory approval timelines can delay completion by weeks or months. An experienced corporate lawyer will structure the SPA so that completion is conditional upon obtaining these approvals, protecting the buyer’s deposit and commitment.

6. Risk Management

6.1 What if the Seller Gave False Information in the Agreement?

If the seller’s warranties or representations are inaccurate, you have a claim for breach of warranty in the share purchase agreement. In serious cases involving fraud or deliberate misrepresentation, you may also be able to rescind the SPA entirely. The key is to ensure the SPA contains clear, detailed warranties and a strong indemnity clause so there is no ambiguity about what information you relied on when agreeing to the deal.

6.2 What Happens if One Party Breaches the Agreement?

A breach can take many forms including failure to pay on time, refusal to transfer shares, or non-compliance with completion conditions. The non-breaching party can seek contractual remedies such as damages, specific performance (forcing the other party to perform), or termination. The SPA should set out precisely what constitutes a default and the remedies available.

6.3 How Do I Protect Myself from Hidden Company Debts or Liabilities?

The combination of thorough due diligence, robust warranties and indemnities, and the use of escrow or retention sums is your best protection. Without these, you risk inheriting tax arrears, litigation, or regulatory fines that should rightly have remained with the seller.

6.4 Can I Hold Back Part of the Purchase Price as Security?

Yes. A retention sum is a common mechanism in Malaysian SPAs, where part of the price is withheld for a set period after completion. This amount can be used to settle any claims under the warranties or indemnities. The retention period and release conditions should be negotiated carefully to balance protection with fairness.

7. Roles of Lawyers and Advisors

7.1 Do I Really Need a Lawyer to Prepare a Share Purchase Agreement?

Yes. A Share Purchase Agreement is not just a contract. It is a complex risk management tool. A corporate lawyer ensures the agreement is not only legally enforceable but also commercially advantageous. In Malaysia, an SPA may need to address nuances such as sector-specific regulations, stamp duty considerations, and compliance with the Companies Act 2016.

A good lawyer will:

• Anticipate future disputes and draft clauses that prevent them

• Identify regulatory approvals required and make completion conditional on obtaining them

• Ensure payment and transfer obligations are properly sequenced to avoid exposure

• Protect you with strong warranties, indemnities, and termination rights

Without this guidance, you risk signing an agreement that heavily favours the other party.

7.2 Can I Use Share Purchase Agreement Template from the Internet?

Using a generic Share Purchase Agreement template from the internet is risky and often a false economy. Such templates are not drafted with Malaysian law in mind, may omit industry-specific clauses, and could be designed for a completely different jurisdiction.

Even if you use one as a starting point, it must be reviewed and customised by a Malaysian corporate lawyer to ensure the agreement is enforceable and commercially balanced.

There have been cases in Malaysia where parties relied on foreign SPA templates only to discover, when a dispute arose, that critical clauses were unenforceable here. This often results in costly litigation that far exceeds what proper legal drafting would have cost at the outset.

7.3 What is the Role of My Accountant in the Process?

Your accountant plays a critical role in:

• Conducting financial due diligence to confirm the company’s reported position

• Advising on valuation and whether the purchase price is commercially reasonable

• Assessing tax implications, including capital gains tax, withholding tax, and stamp duty

• Assisting in post-completion price adjustments

In high-value or complex deals, your lawyer and accountant should work closely together so that the legal and financial aspects are aligned.

7.4 Who Should Hold the Original Signed Share Purchase Agreement?

Best practice is for both buyer and seller to retain an original signed copy for their records. Additionally, your lawyer should keep a scanned version for secure archiving. In contentious transactions, the party holding the original may have a procedural advantage if the matter goes to court, so proper safekeeping is important.

8. Completion and Post-Completion

8.1 What Documents Must Be Signed or Delivered at Completion?

Completion is the point at which the buyer pays for the shares and the seller transfers legal ownership. In Malaysia, the following documents are typically exchanged:

• Instrument of Transfer of Shares (Form of Transfer) duly executed by both parties

• Directors’ Resolutions approving the transfer and issuing new share certificates

• Updated Share Register reflecting the buyer as the new shareholder

• Share Certificates issued in the buyer’s name

• Any Board or Shareholder Consents required by the company’s constitution

• Resignation Letters for outgoing directors or officers, if part of the agreement

An experienced lawyer will prepare a completion checklist and coordinate the exchange so that payment and document delivery occur simultaneously, preventing either party from being exposed.

8.2 How Long Does it Take to Complete a Share Sale Transaction?

For simple private company share transfers with no regulatory approvals, completion can occur within two to three weeks. However, in transactions involving conditions precedent such as regulatory approvals, financing arrangements, or due diligence investigations, the timeline may stretch to several months.

Parties should always include a long-stop date in the SPA to prevent indefinite delays. If the conditions are not met by this date, either party can walk away without liability, subject to agreed exceptions.

8.3 When Does the Buyer Officially Become a Shareholder?

In Malaysian law, legal ownership transfers when the share transfer is registered in the company’s Register of Members. Even if the buyer has paid and the seller has handed over a signed transfer form, the buyer has no shareholder rights such as voting or receiving dividends until their name is entered in this register. This step is critical and should be verified immediately after completion.

8.4 What Follow-Up Filings Must Be Done with SSM After Completion?

The company must:

• Update the Register of Members immediately after completion

• Lodge the Section 105 Notice of Transfer of Shares with SSM within 30 days of the transfer

• Update relevant statutory records, including directors and shareholders, if there were related changes

Failure to comply can result in fines for the company and its officers. These filings are often handled by the company secretary, but your lawyer should verify they are completed correctly and on time.

8.5 Can the Agreement Include Restrictions on Future Share Sales?

Yes. The SPA may include clauses that restrict the buyer (or the seller, if retaining shares) from selling their shares to outsiders without first offering them to existing shareholders. These are known as pre-emption rights. In some deals, parties also agree to lock-up periods, preventing any sale for a defined period after completion, or non-compete clauses to protect the business.

These restrictions are more commonly and permanently reflected in the Shareholders’ Agreement and the company’s constitution. This ensures the restrictions remain binding on all shareholders, including future ones, and are enforceable even after the SPA has served its purpose.

9. Negotiation and Commercial Considerations

9.1 How Do I Negotiate Favourable Terms in a Share Purchase Agreement?

Successful negotiation starts with clarity on your priorities. Before you enter discussions, identify your non-negotiables, your trade-off areas, and your ideal terms. A good corporate lawyer will help you distinguish between legal protections you must have, such as warranties and indemnities, and commercial terms you can flex on, such as payment instalment schedules.

Tactics to strengthen your negotiation position include:

• Conducting thorough due diligence before making offers

• Using market valuation benchmarks to justify your price

• Insisting on clear, enforceable timelines for completion

• Seeking leverage through conditions precedent that protect your interests

The goal is to build a contract that balances risk, reward, and deal certainty without leaving ambiguity that could be exploited later.

9.2 Should I Agree to a Non-Compete Clause as a Seller in A Share Purchase Agreement?

Non-compete clauses are common in SPAs because they protect the buyer’s investment by preventing the seller from immediately starting a rival business. However, in Malaysia, Section 28 of the Contracts Act 1950 generally prohibits agreements that restrain a person from engaging in a lawful trade, profession, or business.

The law recognises certain exceptions, including:

• When the restraint is part of the sale of the goodwill of a business

• When the restriction is reasonable in scope, geographical coverage, and duration

• When the restraint is necessary to protect the legitimate interests of the buyer

If a non-compete clause goes beyond these exceptions, it risks being declared void and unenforceable. This is why having an experienced corporate lawyer draft and review the clause is critical. A lawyer ensures the clause is tailored to fit within the legal exceptions, protecting the buyer’s commercial interests without breaching the Contracts Act. This prevents the agreement from being challenged and voided later.

Where possible, the clause should also include carve-outs for activities that do not directly compete, giving the seller reasonable freedom to pursue other ventures without breaching the SPA.

9.3 How Much Information Should I Disclose as a Seller During Share Purchase Agreement Transaction?

Full and accurate disclosure is critical to minimise your risk of warranty claims. Known risks should be listed in a disclosure letter, which forms part of the transaction documents. Any matter disclosed in the letter will generally be excluded from the scope of warranties, meaning the buyer cannot later claim for them.

9.4 How Do I Ensure the Buyer Will Run the Company Properly After Purchase?

If you are selling all your shares, you generally lose legal control over how the company is run after completion. If you retain a minority stake, you can use a Shareholders’ Agreement to require certain strategic decisions to have your consent. In regulated industries, you may also rely on licensing conditions or contractual obligations with key customers to maintain operational standards. Once you fully exit, your influence is primarily reputational, not contractual.

10. Dispute Resolution

10.1 What Happens if There is a Dispute About the Share Purchase Agreement?

If a dispute arises over a Share Purchase Agreement, the resolution process will follow the dispute resolution clause in the contract. This clause is critical because it dictates how, where, and under what law disputes will be resolved.

A well-drafted SPA will typically include a stepped process:

• Negotiation, where parties attempt to resolve the dispute informally

• Mediation, where parties may agree to mediation with a neutral facilitator

• Formal Proceedings, where parties proceed to either court litigation or arbitration if mediation fails

10.2 Should Disputes Be Resolved in Court or Through Arbitration?

The choice between court litigation and arbitration has significant commercial and practical consequences.

Arbitration is private, flexible, and allows parties to choose arbitrators with relevant industry expertise. In Malaysia, arbitration is often administered by the Asian International Arbitration Centre (AIAC), which is attractive for cross-border deals because of its neutrality, enforceability, and confidentiality. However, arbitration can be more expensive than court proceedings.

Court proceedings in Malaysia are public and follow established procedural rules and precedent. Reforms in recent years, such as case management systems and e-filing, have made court proceedings relatively faster. Costs are typically lower than arbitration, and appeals are available if you are dissatisfied with the decision.

For cross-border transactions, arbitration via the AIAC is often preferred due to enforceability and confidentiality. For purely domestic deals, Malaysian court litigation may now be a more cost-effective and timely option.

10.3 Can I Sue for Damages if the Other Party Fails to Complete the Deal?

Yes. If the other party breaches the SPA, such as failing to pay, refusing to transfer shares, or not fulfilling conditions precedent, you can sue for damages to recover your losses. In some cases, you may seek specific performance, where the court orders the other party to carry out their contractual obligations.

Conclusion

A Share Purchase Agreement is the foundation of a secure and successful share acquisition. Without it, you risk costly disputes, hidden liabilities, and loss of deal control. If you are ready to acquire or sell shares in a high-value or strategic deal, the right agreement is critical to protect your position and secure certainty.

Legal That Works partners with business leaders who are serious about moving forward, providing precise legal drafting and negotiation to safeguard interests and achieve commercially advantageous terms. Contact us to begin the conversation.