The importance of a shareholders agreement

shareholders agreement

A shareholders agreement is an agreement between the holders of shares in a private company which regulate their relationship vis-à-vis each other and the company.

This agreement must be consistent with the Companies Act 71 of 2008 and with the Company’s memorandum of incorporation.

Here are some pertinent reasons why it is important for shareholders to enter into a shareholders agreement in respect of their company:

  • To anticipate any potential disputes that may arise between the shareholders in the future and determine how such disputes are to be resolved. It is therefore important to include a dispute resolution procedure as well as a deadlock breaking mechanism in the event that there is a deadlock in any votes at a directors or shareholders level otherwise it could lead to the liquidation of the company on just and equitable grounds if it becomes unmanageable due to deadlocks;
  • To protect the shareholders’ interests in the Company and to regulate any potential subscription for shares which could dilute the shareholding of current shareholders or a sale of shares by the shareholders. It is important to determine what procedure the shareholders would be required to follow should they wish to sell their shares. This is to prevent the shares form being sold to “just” any third party. A pre-emption clause is often inserted into the shareholders agreement to cover for this eventuality and a clause that any new shareholder must be approved by the company’s board of directors;
  • To determine what will happen to a shareholder’s shares upon their death, permanent disability or divorce should the shareholder be married in community of property (as his spouse will own 50% of the shares by virtue of their marriage). Will there be financing in place in order that the surviving shareholders can purchase the shares, such as buy and sell agreements?
  • It may further be important to include a valuation methodology in one’s shareholders’ agreement in order to regulate how the shares are to be valued and by whom in the event of sale of any shares for whatsoever reason. This will avoid room for dispute or disagreement on the asking price for the shares by the selling shareholder;
  • The shareholders agreement should also regulate the appointment of directors of the Company as well as the directors duties and responsibilities towards the Company.

These are just a few important aspects that should be covered in a company’s shareholders’ agreement. The aim is to draft your company’s shareholders agreement specific to your  company’s corporate and commercial needs to ensure its sustainability and that the directors and staff can focus on the business of running the business of the company and not be bogged down by peripheral issues.

Should you require assistance on a shareholders agreement or related advice including director induction and training and corporate compliance please contact Goldberg & de Villiers Attorneys us on 041 501 9806 or / for personalised expertise corporate and commercial law advice.

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