Why every company needs a tailored Shareholders’ Agreement

shareholders'A Shareholders’ Agreement is just that – an agreement between the shareholders of a company.  This agreement is an invaluable resource for any business as it structures the relationship between the shareholders and provides the foundation for how they will interact with each other.

A Shareholders’ Agreement is drafted in order to protect the interests/investments of all the shareholders of the company. It further sets out the duties and rights of the shareholders and regulates the process surrounding the sale of shares by one or more of the company’s shareholders.  The Companies Act No. 71 of 2008 (“the Act”) does not regulate buy-out of shares.  Therefore, unlike the Memorandum of Incorporation (“MOI”), it is a confidential agreement not filed in public office.

Without this agreement, possible disputes that are looming in the future between shareholders will not be regulated in a constructive manner.  These unregulated disputes will have a negative effect, not only on the company, but also on the relationship between shareholders.

Although the company’s Memorandum of Incorporation (previously known as articles of association) will help to some extent, a fully considered and well-drafted Shareholders’ Agreement will act as a much needed safeguard where the MOI lacks protection.  It is of the utmost importance to ensure your Shareholders’ Agreement is tailored to your company’s specific needs while still being in line with the provisions of the Act, and that it aligns with its MOI.

How are shares valued?  How do you sell shares?  Do your fellow shareholders have a right of first refusal to purchase your shares?  These are the types of scenarios you think you will be able to sort out between shareholders, but when it comes to this, it is quite a different story in practice.

This agreement should contain specific, important and practical rules relating to the company and the relationship between the shareholders which would be beneficial both to minority and majority shareholders.

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