Understanding Shareholder Agreements in South Africa

Shareholder agreements are essential legal documents that regulate the relationships between shareholders in a company. In South Africa, they play a critical role in corporate governance and company management, ensuring that shareholders' rights and interests are protected and that the company is run efficiently and effectively.

In this article, we'll provide an overview of shareholder agreements in South Africa, their importance in corporate governance and company management, and key provisions that should be included in a legally compliant shareholder agreement.

What is a Shareholder Agreement?

A shareholder agreement is a legally binding document that sets out the rights and obligations of the shareholders in a company. It outlines the shareholders' relationships with each other and with the company, establishes rules for decision-making and dispute resolution and protects shareholders' rights and interests.

Shareholder agreements are not required by law in South Africa, but they are highly recommended for companies with more than one shareholder. They provide a framework for corporate governance and company management, helping to ensure that the company is run efficiently and effectively.

Importance of Shareholder Agreements in Corporate Governance

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Shareholder agreements play a crucial role in corporate governance, establishing the relationships between shareholders and the company and ensuring that the company is run in a transparent and accountable manner.

Shareholder agreements provide a framework for decision-making, establishing the procedures for appointing and removing directors, and defining the roles and responsibilities of the board of directors and executive management. They also establish the procedures for resolving disputes between shareholders, protecting shareholders' interests, and promoting transparency and accountability within the company.

What are the Benefits of having a Shareholders Agreement?

Whilst shareholder agreements are optional, we highly recommend them as they play a critical role in providing the shareholders, directors and the company with clear guidance as to what their respective rights, duties and obligations are. There are many benefits in having a shareholders agreement, and we have highlighted some of the key benefits below.

Confidentiality

A shareholders agreement does not have to be registered with CIPC, unlike a company’s memorandum of incorporation which is viewable by the public. A shareholder agreement is only seen between the shareholders in the company.

Pre-emption rights

In terms of the Companies Act, pre-emption rights only apply to a fresh issue of shares and not to the transfer of existing issued shares. By including these provisions, when a shareholder wishes to sell their shares, they are first obliged to offer their shares to the remaining shareholders before they can sell their shares to a third party.

Minority shareholder protections

Where a company has minority shareholders, their rights can be protected through a variety of mechanisms in the shareholders agreement to prevent abuse and oppression from a majority shareholder.

Appointment of directors

A shareholders agreement can be used to regulate the appointment of directors by the shareholders.

Dividends policy

It is of great importance to specify when, how, etc. shareholders are to receive the profits of the business.

Conflict resolution and a reduction in conflict

A well drafted agreement has the ability to reduce the amount of potential conflict between shareholders. This is important because disputes are hugely distracting, and ultimately can affect the company and its viability. Clear mechanisms should included for the resolution of the disputes and this will help the company to be run smoothly and profitably.

Key Provisions in a Shareholder Agreement

A shareholder agreement should be tailored to the specific needs and requirements of the company and its shareholders. However, there are certain key provisions that should be included in any legally compliant shareholder agreement in South Africa. These include:

• Shareholder rights and obligations: The shareholder agreement should outline the rights and obligations of each shareholder, including their voting rights, the procedure for the transfer of shares, and restrictions on share transfer.

• Decision-making: The shareholder agreement should establish the procedures for decision-making, including the appointment and removal of directors and the approval of major transactions and changes to the company's constitution.

• Board of directors: The shareholder agreement should define the roles and responsibilities of the board of directors, including their appointment, remuneration, and decision-making powers.

• Dispute resolution: The shareholder agreement should establish the procedures for resolving disputes between shareholders, including mediation, arbitration, or court action.

Shareholder agreements are essential legal documents that regulate the relationships between shareholders in a company. They play a critical role in corporate governance and company management, ensuring that the company is run efficiently and effectively and that shareholders' rights and interests are protected.

By understanding the importance of shareholder agreements in corporate governance, including key provisions that should be included in a legally compliant agreement, companies and their shareholders can establish a solid foundation for decision-making, dispute resolution, and effective company management.

Barter McKellar’s company lawyers have extensive experience dealing with drafting and reviewing shareholder agreements as well as with the various shareholder disputes that can arise when faced with a poorly drafted agreement. If you would like to find out more, contact our offices today to schedule a consultation with one of our specialist corporate law attorneys.