Shareholders' Agreement

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Attorney approved Practical points considered

Shareholders' agreements are a necessity for any company, because they set out the rights of one shareholder against another, both majority and minority owners will want comprehensive agreements to protect their interests and investment in the company. These agreements do just that, covering a large range of matters, simply and logically. It takes over where company law stops.

The first is to protect minority shareholders' rights and investment value. Without an agreement, majority shareholders may force issues that are not in the minority shareholders' interests and that could reduce the value of the minority shareholders' interests in the company.There are two essential reasons for having a shareholders' agreement:

  • The second is clarity of decision making. In circumstances where shareholders of any size are also directors, operational decisions that would ordinarily be taken by directors accountable to all shareholders or made only with the consent of all shareholders might be made instead in the interest of a single shareholder without having been brought to the attention of the others. A good shareholders' agreement should set out the decisions that must be made in the capacity of a shareholder rather than a director. Similarly, directors may feel unable to take business decisions (and act as directors) without shareholder approval.

Disputes between shareholders and other stakeholders are expensive and can be disruptive and detrimental to the on-going operation of the business. Having a clear agreement in place reduces the likelihood of disputes and makes resolving any that do occur easier. A clear and comprehensive agreement also reduces the need for subjective decision making by an arbiter or judge that can give shareholders, and particularly minority ones, so much uncertainty and worry.

This shareholders' agreement protects the interests of the minority shareholders and provides a detailed framework of freedom for working shareholder-directors.

The document additionally includes provision for valuation of the shares of a departing shareholder by reference to a valuation based on your instructions to an accountant. The valuation depends on the parameters used, so your instructions are critical. We have provided a comprehensive version which you can edit according to the deal you wish to strike with a selling shareholder.

The law in this shareholders' agreement

The law in this shareholders' agreement is based on both company law and contract law. Within the structure of company law, you can choose the terms that best suit your situation, so you do not need to study any particular law to be able to edit your shareholders' agreement. The agreement is up-to-date and very comprehensive.

When to use this shareholders' agreement

This agreement is suitable for any private company, no matter what its business. It is about rights, power, control and safeguards, not about your business.

A company's shareholders' agreement can be redrawn at any time, but is commonly done when the relationship between the shareholders and the directors changes.

For a new company, it can be put in place from Day 1, or shortly afterwards. The best time is always "now". Clarity on how decisions are made will let you sleep better at night, whether you hold a small proportion or a large majority of the shares.

All the shareholders must sign the shareholders' agreement but there are no rules about which of them must manage the process of taking the agreement through to signatures. Any shareholder could suggest that the document is necessary and could start the discussions.

Examples of these provisions are:

  • obligations of the company to the shareholders (the company is also a party to the agreement);
  • how shareholders will maintain their rights if they are not present at meetings;
  • roles of directors and actions by the company or a director which require shareholders' consent: controls and redistributes power between shareholders so that majority shareholders cannot force decisions;
  • new shareholder rights and restrictions: even if he is a trustee in bankruptcy;
  • how to deal with new intellectual property;
  • transfers of shares and rights of pre-emption: when allowed, under what conditions and to whom;
  • exit strategy: the hidden bomb if neglected;
  • key man insurance;
  • publicity about the deal;
  • confidentiality;
  • use of a shareholders own assets in the business;

Draftsman

This document was written for Agreements.org by a Senior Attorney (Admitted in the High Court) with more than 15 years’ experience. It complies with current South African law.

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