Under the previous Companies Act of 1973, shareholders agreements (and share sale agreements) played a very important role and proved to be a powerful business tool in negotiations between shareholders and with investors. They were also vital for the general growth and management of a company. In many instances, these agreements determined important issues such as the powers of the directors and management as well as governance issues.
One of the reasons why these agreements are so powerful is because they are private documents and therefore, relatively speedy to execute as opposed to the legalities involved in amending the articles and memorandum of a company (constitution). Previously, shareholders agreements could, in most instances, supersede (if so contracted) the articles and memorandum of a company. In other words, a private document would prevail over a public document if so stipulated. This contract phrase prevented legal uncertainty to some extent. Although this has been a very practical commercial business tool, it has certainly been abused.
As a result, the legislator has addressed this concern within the framework of the Companies Act 71 of 2008 (henceforth called the “Act” or the “new Act”). This is further reinforced by the memorandum and objects of the Act, which state that the purpose of the amendments is to ensure amongst other things:
- The simplification and easy maintenance of corporate systems
- Corporate flexibility, efficiency and transparency.
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