Most people who launch a business together trust and know each other. They’re happy with a handshake deal and assume nothing can or will ever go wrong. In the business world this often very far from the truth – the reality is that things do go wrong.
A shareholder’s agreement is a very important document to have as it regulates the relationship between the shareholders themselves, as well as the relationship between the shareholders and the company itself. Be that as it may, a shareholder’s agreement is not required by law.
Advantages of a Shareholders Agreement
- It is a private document and it is not open to public scrutiny.
- It protects the minority shareholders by restricting the majority shareholders from using their powers to the exclusion of the minority shareholders.
- It creates certainty especially regarding all the rights and duties each of the parties have.
- Any claim for damages or breach of the agreement is based on remedies provided by the law of contracts.
- It regulates the raising of capital.
Disadvantages of a Shareholders Agreement
- It only binds those who are party to it and only binds new shareholders if they consent to be bound by the agreement.
- Amendment of the shareholders agreement needs the consent of all the shareholders who are party to it.
Although a shareholder is not obliged to sign a shareholders agreement, it is advisable that all shareholders (present and future shareholders) should be signatories thereto.
What May be Included In a Shareholders Agreement
The shareholders agreement can contain a vast number of provisions. Each agreement will be different depending on the objectives of the shareholders involved.
- It can stipulate who is involved in the actual day-to-day business of the company as well as what responsibilities all the shareholders have to the company.
- It may also include provisions on decision making such as how the dividends of the company will be paid out to the shareholders and how the shareholders will appoint directors.
- It can include provisions regarding the funding of the company – shareholders can decide what contribution to the company each shareholder will make and how funding for the company in the future will be acquired.
- It will usually include provisions outlining the procedure that must be followed when a shareholder wishes to relinquish his role as shareholder and provide for the protection of the remaining shareholders should the exiting shareholder wish to sell to a third party.
- Dispute resolution procedures may also be included and provision can be made for how the shares should be valued. This provision should also put procedures in place to resolve the disputes as they arise.
Beware of conflicts between the Memorandum of Incorporation (“MOI”) and the Shareholder’s Agreement.
Since the Companies Act of 2008 came into effect in 2011, MOIs should contain much more detail. CIPC does offer free MOI templates, but they are very basic and we would not recommend that they are used. They leave out many important clauses that we can draft into a bespoke MOI to protect minority or majority shareholders, or even just one particular shareholder.
At the very least the template MOI should be carefully amended by an attorney to suit the client, and not just adopted as is. An aspect that often gets overlook is that the provisions of the shareholder’s agreement (especially when a template is used) may very well be in conflict with the provisions of the MOI.
The MOI trumps all other agreements between shareholders, so if it conflicts with the shareholder’s or even a Buy & Sell Agreement, the provisions of the MOI will prevail. As such, if a shareholder’s or Buy & Sell Agreement is concluded, the MOI may need to be amended so there is no conflict between the two.
It is also worth mentioning that there are also differences in how the documents bind new shareholders. The MOI automatically binds new shareholders without their explicit agreement, while a Shareholders Agreement needs to be agreed to before being binding.
When do I Need A Shareholder’s Agreement?
It is advisable to have a shareholder’s agreement in place when the company is started, or the company has more than one shareholder, but it can be concluded at any time and it can also be entered into when a new shareholder gets shares.
We all hope that everything will go well, but prevention is better than cure and a lot less costly.
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