Shareholders’ agreements 101

Shareholders’ agreements 101

A shareholders’ agreement sets out how a private company should be operated and regulates the various shareholders’ rights and obligations. It is therefore important that a shareholders’ agreement be concluded at the beginning of the relationship to prevent disputes later on.

The Companies Act No. 71 of 2008 (“the Act”) expressly recognises shareholders’ agreements. Section 15(7) of the Act states that shareholders of a company may enter into any agreement with one another in respect to any matter relating to the company. It is, therefore, possible that a shareholders’ agreement may contain a vast array of provisions, but there are certain general provisions that should be considered.

  1. Duties and obligations of the shareholders: It may be that certain or all of the shareholders are not part of the day-to-day business of the company, in an employee capacity or even as a director, but may have other responsibilities towards the company and/or the other shareholders.
  2. Decision-making: It is important to determine how decisions will be made on a shareholder level – this may be regarding anything from how directors will be appointed to dividends that may be declared.
  3. Funding of the company: In a new start-up company, it is highly unlikely that there will be no funding from shareholders. A shareholders’ agreement may address existing shareholder funding as well as future funding by shareholders, whether there is a duty to provide funding, and also how shareholders may reclaim the funding from the company.
  4. Exiting of shareholders: When the time comes where a shareholder wishes to exit, there should be no uncertainty as to the process to be followed by the parties. A shareholders’ agreement may regulate the notice that should be given to other shareholders, the pre-emptive rights, the protection of minority shareholders should the exiting shareholder sell his or her shares to a third party, and also how the shareholding will be valued.
  5. Dispute resolution: It is inevitable that disputes will arise in any business relationship. A shareholders’ agreement may set out the procedure that the parties can turn to in times of dispute.

The advantage of a shareholders’ agreement is that the document constitutes a private document between the parties, which is not open for inspection by the public, as it is not filed with the Companies and Intellectual Property Commission (“CIPC”). Secondly, the shareholders’ agreement creates a binding and enforceable agreement between the parties.

On the other hand, the shareholders’ agreement only binds the shareholders that are parties to the agreement unless the new shareholders’ consent to be bound to the shareholders’ agreement. The shareholders’ agreement may also only be amended with the consent of the shareholders.

Section 15(7) of the Act furthermore states that a shareholders’agreement must be consistent with the Act as well the company’s memorandum of incorporation. Any provision in a shareholders’ agreement that is inconsistent with the Act and/or the company’s memorandum of incorporation will be void.

A shareholders’ agreement can be a vital tool to plan and operate your business, but it is important that a shareholders’ agreement be tailored to the needs of your business.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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