Benefits of a Shareholders Agreement

Shareholders’ agreements can regulate the following matters to provide for contractual certainty between shareholders:

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1)            Deadlocks in Decision Making

If there are deadlocks in decision-making at the level of the board of a company or between the shareholders, the way to resolve these deadlocks may be addressed in the shareholder’s agreement for instance by deferring certain decisions of the board for decision-making to a meeting of shareholders or requiring the deadlock to be directed to arbitration.

2)            Pre-emptions and transfers of shares

Shareholders’ agreements may provide for how the shareholders sell, transfer, and dispose of their shares and make claims against the company.

Ordinarily, the shares will be offered to existing shareholders first.

The shareholder disposing of their shares can also provide conditions for the sale of the shares, for instance, that they are released from any surety on behalf of the company, or if the release from the surety cannot be procured, that the acquiring shareholder indemnify the shareholder against any claims made by virtue of the suretyship.

3)            Forced or Deemed Sales

            Shareholder agreements can provide for circumstances in which a shareholder is deemed to offer their shares to remaining shareholders in instances where the remaining shareholder would no longer wish for that shareholder to retain its interest in the company, for instance when:

3.1) A shareholder who is a company is no longer controlled by certain shareholders;

3.2)     if a shareholder cannot provide loan finance or refuses to sign surety on behalf of the company when required by the shareholders agreement to do so;

3.3) if a shareholder who is a natural person passes away;

3.4) If a shareholder who is a company is liquidated or a natural person who is a shareholder is sequestered,

3.5) if a shareholder ceases to be an employee of the company.

4          Come Along & Tag Along Clauses

4.1       The majority shareholder(s) holding usually more than 50% of the shares in the Company may wish to oblige remaining shareholders to sell their shares if the majority shareholder(s) obtain an offer from a third party to purchase their shares.  The offer made by the third party will be identical in respect of the majority shareholders’ shares as with the shares of the remaining shareholders. This is known as a “come along” clause. This enables the majority shareholders to sell 100% of the company if required.

4.2 A “tag along” clause can allow the minority shareholders to elect to tag along on the sale of the majority shareholders’ interests in the company. If, for instance, shareholders holding shares constituting 60% of the issued shares in the company receive an offer for their shares from a third party, the remaining shareholders can require in terms of a tag-along clause that the third party also obtain their shares on the same terms.

5          Put Option

5.1 A shareholder may wish to reserve for itself the right to sell its shares in the company to another shareholder. The Put and Call Option Clause will address the terms of this contractual right and how it is to be exercised.

6          Funding of the Company

The Shareholders Agreement can address how the parties wish to finance the company and whether they will be obliged to provide their own funding, provide sureties, or approach financial institutions for finance, as well as how shareholder loans to the company will be treated and when these are to be repaid.

7          Dividends

            The shareholders agreement can provide for a dividends policy within the Company provided that the provisions of section 46 of the Companies Act 2008 has been met.

The provisions of the shareholder agreement must not conflict with the Memorandum of Incorporation of a Company.

Provisions pertaining to shareholders’ rights and responsibilities may also be addressed in the Memorandum of Incorporation and not in a separate shareholders’ agreement; however, the Memorandum of Incorporation is lodged with CIPC and may be accessible to the public, whereas a shareholder’s agreement is not lodged with CIPC.

Article by Lisa Boogaard

15/11/2022

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