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Should you bother with a shareholders’ agreement?
19 May 2022
 
You’ve decided to set up a company or have had a company for a while but have never gotten so far as to have a shareholders’ agreement drawn up for the company shareholders. You’ve wondered if it’s necessary or even what the point of a shareholders’ agreement is. In this article we briefly explain the purpose of these company documents and how they relate to each other.

You’ve decided to set up a company or have had a company for a while but have never gotten so far as to have a shareholders’ agreement drawn up for the company shareholders. You’ve wondered if it’s necessary or even what the point of a shareholders’ agreement is. In this article we briefly explain the purpose of these company documents and how they relate to each other.

With the Companies Act 71 of 2008 having been around for a number of years, one most certainly cannot use the word “new” anymore when referring to this Act. Yet, despite the Act introducing a number of developments such as the Memorandum of Incorporation or “MOI”, there is often still great uncertainty as to the relationship between an MOI and shareholders’ agreement and whether a shareholders’ agreement is at all necessary.

In terms of the Act the MOI is positioned as the key founding document of a company and requires that any shareholders’ agreement must be in line with the company’s MOI and the Act. The MOI is binding between the company and each shareholder, between the shareholders themselves (if there are more than one), and between the company and each director or prescribed officer, or any other person serving the company as a member of a committee of the board. Irrespective of the number of directors or shareholders in a company the MOI remains the most important foundational document of a company.

When registering a private company with the Companies and Intellectual Property Commission (“CIPC”), the CIPC provides all newly registered companies with a short standard MOI contained in the Regulations to the Companies Act. Fortunately, the Companies Act also allows companies to amend this default MOI by filing a bespoke MOI to include additional provisions, ensuring that companies can address their specific and individual needs.

The shareholders’ agreement of a company on the other hand only applies if there is more than one shareholder and takes the form of an agreement entered into between multiple shareholders of a company. The primary aim of such an agreement is to regulate the relationship between the shareholders of the company.

Shareholder agreements typically will require consideration of the way in which the company shareholders will manage their affairs, for example, the buying and selling of shares, share valuation, shareholders’ duties and responsibilities etc. In many ways such an agreement is similar to a partnership agreement between business partners, with the shareholders’ agreement contractually regulating the relationship between shareholders.

An important hierarchy to note is that if the MOI is in conflict with the Act, the Act generally trumps the MOI. In turn, if a shareholders’ agreement conflicts with the MOI, the MOI generally trumps the shareholders’ agreement.

Besides the fact that the MOI supersedes a shareholders’ agreement, there is another major difference between the two documents. An MOI must be submitted to the CIPC making the MOI a public document. The shareholders’ agreement on the other hand is not generally publicly available. A shareholder’s agreement is therefore private and can contain confidential information relating to the shareholders and the company.

But should you have a shareholders’ agreement? In our view, we believe it generally important to have such an agreement in place where there are multiple shareholders to regulate the relationship between the shareholders and company more extensively. Private aspects of the company and shareholders can also be addressed in this agreement. Care must however be taken to carefully assess the relationship between the MOI and shareholders’ agreement to avoid conflicts that could have unforeseen consequences and override the agreed upon provisions of the shareholders’ agreement.

If you don’t yet have or have been wondering about whether you should get a shareholders’ agreement drafted for your company, make contact with your attorney or a corporate specialist to help you look into options for getting a shareholders’ agreement in place.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).