VLP Legal Press #42: Shareholder Relationships in Cambodia: Doesn't the Law Already Protect Me? Why do we need a Shareholders’ Agreement?
A familiar story
Most joint ventures in Cambodia start with a handshake based on trust, and most problems start when the money runs short.
Two friends, one a foreign investor and one a local operator, register a private limited company in Phnom Penh. They decide to split the shares 50/50. The business grows, but revenue does not cover its expenses. The business needs more cash. One partner cannot pay and the other proposes to take over, but nobody can point to a document that says what should happen next. That document (commonly known as shareholders’ agreement or joint venture agreement) was never written. Some parties don’t even talk about these foreseeable scenarios before the official formation of the business. It is especially difficult to assume the expectations of the other party when both parties come from very different commercial background and experience.
If you are running or planning to run a business with a partner in Cambodia, today’s VLP Legal Press is for you!
"Wouldn't the law already protect me?"
Cambodian company law, i.e. the Law on Commercial Enterprises of 2005 and the Law on the Amendment to the Law on Commercial Enterprises 2022 (LCE) set the basic rules for how a private limited company is formed and operated. Those rules apply to every company incorporated in Cambodia.
However, the law does not know the commercial deal between the parties. It does not know who is putting in the money, who is running the business full time, who gets paid by the business, or how each of you plans to leave the business. Most business partners do not know what is covered under the law. Some may rely only on the standard memorandum and articles of association (i.e., company’s statute/constitution) (MAA) prepared in prescribed form containing standard wordings merely for company registration purpose, without modifying it to the parties’ commercial arrangement. Article 223 of LCE anticipates that shareholders may sign a written agreement among them to restricts the powers of the directors to manage the business and affairs of the company and recognises its validity.
Where the law is silent, you are relying on goodwill and amicable discussion between the parties. Sadly, such goodwill rarely survives when things turn sour between the parties.
Here is a simple test. Try to answer the four questions below. If you can answer all four with confidence and clarity, you and your business partner have already thought through some of the most important issues. If you cannot, that is exactly why you and your business partner should start working towards getting a shareholders' agreement or a joint venture agreement signed.
The simple test
1. What happens when the company needs more funding, but some shareholders cannot pay?
The company needs USD200,000 to expand. One 50% shareholder can pay. The other cannot.
Without an agreement: raising new capital normally needs shareholder approval, so a 50/50 split can create a deadlock in decision-making. There is also no pre-agreed rule on whether the money comes as a loan or new shares, or what happens to the ownership of the partner who cannot pay. Pre-emption right (i.e., first opportunity of the existing shareholder to subscribe new shares issued by the company) is available only if the company’s articles provide it.
With one: parties will agree upfront on how funding is raised, who gets the first right to put in money, and what happens to a shareholder who cannot, such as a loan from the other partner or a reduced shareholding of the shareholder who cannot provide additional fund.
2. One shareholder runs the business full time and the others are only investors. How is that shareholder rewarded?
Mr A manages the company every day. B and C invested money and do nothing else.
Without an agreement: nothing says Mr A is entitled to a salary. Shareholders are generally rewarded through dividends in proportion to their shares, so A's full-time work earns the same return per share as B's and C's passive money. Alternatively, Mr A may decide to draw a large salary without B’s and C’s agreement.
With one: it states whether A is paid a salary, how much, who approves it, whether there is a bonus, and whether A earns extra shares over time for his effort. It also covers what happens if A leaves.
3. Who owns the product or intellectual property created during the joint venture?
One partner brings a recipe, a brand or a software idea. The joint venture then develops a new product.
Without an agreement: ownership usually depends on who created it and what was signed. The creator, or the partner who brought the idea, may end up owning it instead of the company. Nobody knows what happens if the creator leaves the business.
With one: what each partner brings in remains theirs but should be licensed to the company, anything created during the joint venture belongs to the company, and what happens on exit should be pre-agreed and covered under the written agreement.
4. What happens when a shareholder passes away?
A partner dies unexpectedly.
Without an agreement: his shares generally pass to his heirs under inheritance law. Your new partners may be family members with no business experience, who may live overseas, and who may demand payment for shares that nobody agreed how to value.
With one: the surviving shareholders can buy the shares at a pre-agreed price or method, within a set time. The family receives fair value and the business keeps running.
What is the difference between a shareholders' agreement, a joint venture agreement and a partnership agreement?
The names are used loosely, so look at what the document does rather than what it is called.
🏢Shareholders' agreement
What it is? - Owners (shareholders) of a company agree how it is owned and run
Separate company? - Yes, usually a private limited or public limited company already exists or is being formed
Main focus? - Control, funding, share transfers, exit
Personal liability? - Generally limited to the money invested in shares
🗺️Joint venture agreement
What it is? - Two or more businesses join forces for a defined project or business.
Separate company? - Sometimes. It can be run through a new company or by contract alone (unincorporated joint venture is less common in Cambodia).
Main focus? - Scope of the project, what each side contributes, IP, sharing profit.
Personal liability? - Depends on the structure used.
👥Partnership agreement
What it is? - People or businesses agree to run a business together as partners in the form of a partnership.
Separate company? - Usually no. The business is run through a partnership set up under the LCE. Partners are usually directly liable to the losses of the partnership.
Main focus? - Roles, profit sharing, liability.
Personal liability? - Partners may be personally liable for the business's debts
In practice they overlap. If your joint venture runs through a Cambodian private limited company, which is the most common route for investors, the key document works like both a shareholders' agreement and a joint venture agreement.
Why do we need one?
Because it replaces assumptions about each other’s expectations with a written deal. It gives you two things:
Certainty. Everyone knows who decides what, who puts in what, and who gets paid. In addition to that, what a party can do, must do or should not do.
A way out of deadlock. A 50/50 company with no tie-break rule can simply stop, with no agreed way forward.
It is also far cheaper to agree on these points while you are still friends, at the time the joint venture is formed, than to argue about them in a dispute later.
Can I write a more detailed MAA to cover all these issues?
Yes, you can. The standard MAA form is only a sample. Companies can adapt it to suit their needs, as long as the changes is not inconsistent with the law.
But it should be noted that the MAA must be registered with the Ministry of Commerce, so any change you make to it, at any time, must also be registered. That takes extra time and paperwork.
This is why companies should have a separate shareholders' agreement. It is a private contract between the owners, and it can be amended and updated whenever all the parties agree in writing, with no registration needed. That makes it much more flexible.
In practice, the two documents do different jobs:
The MAA sets out the standard, legally required basics of the company.
The shareholders' agreement covers how the business actually runs and the commercial terms between the business partners.
Can I draft one myself?
You can, and nothing stops you from writing one (especially with AI tools). The risk is in what you do not know to include. An AI drafted agreement may look professional and complete, but a clause that works well in other countries may not suit the Cambodian LCE, sit well with your company's own articles or meet the requirements of the Cambodian authorities.
A practical middle path is to write down the commercial points yourselves, in plain language, covering who invests what, who works, who gets paid and how you exit. Then ask a lawyer (ideally, us😊) to turn it into a proper agreement and advise you on the points you missed and how they generally work in Cambodia.
Before you set up your joint venture business, go through this list
A shareholders' agreement is cheapest and easiest to agree when everyone is still friendly. Before you put money in, make sure you can answer each of these in writing:
Who are the shareholders, what percentage does each hold, and how much is each paying for their shares (cash, in kind, or in stages)?
Who works in the business, and how are they paid?
Has a dividend policy been agreed?
How many board members, and how many can each shareholder nominate?
How are decisions made, for day-to-day matters and for major ones that need all or most shareholders to agree?
How are deadlocks resolved?
How will the company raise more money, do existing shareholders get the first right to buy new shares, and what happens if someone cannot pay?
Who can sell shares, to whom, and at what price? Do the others get the first right to buy, or the right to sell alongside or force a sale?
What happens if a shareholder dies, leaves or wants out?
Who owns the intellectual property, now and in future?
Can a shareholder compete or take staff and clients immediately after exit?
What happens if a shareholder unfairly uses trade secrets for private gain, and what must stay confidential after exit?
Do note that the above list is not exhaustive. Please speak to a lawyer before you form the business or pay in capital. VLP Law Office advises investors on shareholders' and joint venture agreements in Cambodia.
🚨The information in this article reflects the law as at the date of publication and is for general reference only. It does not constitute comprehensive legal advice. If you need further guidance, feel free to reach out to us at connect@vlplaw.co.