SME Legal Risk Guides

What Happens When a Shareholder Wants Out and There's No Exit Mechanism?

Without an agreed exit mechanism, one shareholder wanting out becomes a negotiation with no rules, and often no deadline. There is no default formula in the Companies Act 2016 for what the shares are worth, who has to buy them, or how quickly this needs to resolve. In practice this means whichever shareholder has more leverage, more cash, or more patience usually wins, regardless of what is fair. We have seen this stretch on for over a year, with the business itself suffering while two shareholders are effectively frozen mid argument. The fix is not complicated. It is a clause that should have existed from day one.

Five mistakes we see most often

1.Assuming we'll figure it out is a workable plan if someone wants to leave.
2.No agreed valuation method, leaving both sides free to argue for whatever number suits them.
3.No timeline forcing a resolution, so the disagreement can drag on indefinitely.
4.No mechanism for what happens if neither shareholder wants to buy the other out.
5.Discovering the problem only after the relationship has already broken down, when goodwill is gone and cooperation is hardest.

Check your own position

There is a written, agreed method for valuing shares on exit.

There is a clear timeline for how long a buyout negotiation is allowed to run before a default mechanism kicks in.

There is a deadlock resolution mechanism if neither side wants to buy the other out.

The mechanism was agreed while the relationship was still functional, not drafted mid dispute.

Both shareholders have actually read and understood what the exit mechanism says, not just signed it.

Quick answers

Can we still agree on an exit mechanism if we're already in a disagreement?

It is harder, and usually needs a neutral third party or lawyer involved, but yes, it is possible. It is simply a worse position to negotiate from than having it agreed beforehand.

What is a typical fair valuation method for a private Malaysian SME?

There is no single universal answer, it depends on the business and what both shareholders agree is fair, commonly a formula tied to audited accounts or an independent valuer. The point is having any agreed method before you need one.

Does a company constitution cover this automatically?

Rarely in any useful detail. Most standard constitutions are generic and do not address a genuine two shareholder exit scenario with any real specificity.

Caught in a shareholder situation with no clear way out?

Start with a free 2 minute risk check to see your overall exposure, or WhatsApp CF Lee directly to talk through your specific shareholder structure.

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