Starting Up, the legal perspective

When starting a business it is essential that you seek the assistance of professionals to provide advice and equip you with the necessary knowledge to ensure the success of your business. For example a company secretary can assist you to incorporate your company, an accountant would advise you on tax matters and a lawyer will advise you on legal issues affecting your business.

Whether you are starting your own business or taking over an existing business, you will come across issues that will potentially give rise to a legal dispute.

Majority of legal disputes that may arise are inter alia in the following areas:-

a) Contractual issues, whether it is about buying or renting a property for your business or getting a franchise, distributorship or dealership, or tendering for

work or supplying goods to your customer;

b) Employment matters, whether it is about hiring or firing an employee;

c) Directors’ duties and rights of shareholders;

All contracts entered in Malaysia are governed by the Contracts Act 1950. However, there are certain specific law for example the Sales of Goods Act 1957, Franchise Act 1998, Direct Sales Act 1993, Carriage of Goods by Sea Act 1950, Carriage by Air Act 1974 etc. which govern specific contracts. It is important to seek legal advice before entering into any agreement and know your contractual rights in the event of a breach and the legal remedies that can be sought in the event of the breach. Although it is common that many transactions are based on verbal promises, it is advisable to try to reduce the contract into writing to ensure that your rights are protected in the event of a breach.

In cases such as joint ventures, it is advisable for parties to spell out their rights and obligations before the incorporation of the company. The parties may consider entering into a Pre-Incorporation contract to protect each party’s rights before the setting up of the companies. If you are taking over the business by purchasing the shares of the company you may want to have a Letter of Intent outlining specifically the terms and conditions under which you intend to purchase the shares. Another way of protecting rights of parties before formalizing an agreement is to enter into Memorandum of Understandings (MOU). A MOU can be easily described as a gentlemen’s agreement between parties to achieve a common end.

As for employment matters, a carefully drafted employment contract is essential to ensure the scope of work and expectations are well defined. In addition to an employment contract, many companies have a general employees’ code of conduct booklet to deal with disciplinary and other possible human resource issues. In Malaysia, hiring and firing employees must be in line with the labour practices as promulgated in the Employment Act 1955 and the Industrial Relations Act 1967.

It is not uncommon to find that even within the company, there would be dispute between directors and between shareholders which can arise for all sort of reasons. The company’s article of association and shareholders agreement should be able to cover many of the potential areas of dispute between directors and shareholders. The shareholders agreement can make provisions for dispute resolutions to avoid costly litigation.

Esther Geetha Jayaraja