If you share a business trading as a proprietary company with one or more business partners, it’s important to have a clear shareholders’ agreement in place.
The best advice is to have a legal professional assist in drafting this agreement.
However, it’s useful to know the basics of how to write a shareholders’ agreement yourself. This equips you to negotiate with business partners. It lets you decide what terms best suit your situation. If relevant, it can also help you tell a legal practitioner what you really want from the agreement.
What is a shareholders’ agreement?
A shareholders’ agreement, also known as a stockholders’ agreement, is an agreement between all the shareholders of a business.
It outlines how a business will be run and details each shareholders responsibilities, rights and obligations.
The agreement ensures that all shareholders are on the same page before the business starts operating, so, in theory, there can be no disputes later on.
What’s the difference between a shareholders’ agreement and a business partnership?
A shareholders’ agreement is used for a registered company (a Pty Ltd) and protects the rights and interests of the shareholders. It also defines how the company should be managed.
A business partnership agreement is used for partnership businesses that aren’t necessarily registered. It’s an agreement between two or more business partners to establish profit shares, contributions, responsibilities and more.
Difference between a shareholders’ agreement and MOI
A Memorandum of Incorporation (MOI) is a document that states the rights, responsibilities and duties of shareholders and directors. It’s compulsory for registered companies to file an MOI with the CIPC. An MOI is available for public viewing.
A shareholders’ agreement is an internal document that’s not compulsory and doesn’t need to be filed with the CIPC. The two should align, as the MOI trumps a shareholders’ agreement if the two conflict.
What to include in a South African shareholders’ agreement
Every company’s shareholders’ agreement will differ slightly, but they should all cover the following basic considerations.
Board of directors
This will determine the maximum number of directors, the percentage of shares required to become a director, how a director can be removed, board meeting protocols and voting protocols.
Money in and out
This covers the money each shareholder is required to contribute as start-up capital, where additional money will come from if needed and profit-sharing between shareholders.
This dictates how much each shareholder has, the different share classes (if applicable), rights attached to each share class and any restrictions on specific shareholders.
Roles and responsibilities
You must stipulate the roles and responsibilities of each shareholder within the company, where applicable. Shareholders aren’t automatically employees, but they can still have responsibilities.
It’s necessary to record how decisions are made, especially for changes to the company’s vision or how it is run. For example, are decisions made by voting or some other process?
Issuing of new shares
You must cover the rules on shares issues. Usually, new shares are first offered to existing shareholders on a pro-rata basis.
Selling of shares
How can shareholders sell their shares and exit in terms of process, notices, timelines, valuation and method?
Selling the business
If the company is bought by a third party, there must be rules about shareholders who don’t want to sell and how they can stay with the business and keep their shares.
The agreement should outline the process for resolving disputes and provisions for dealing with deadlocks.
Why it’s a good idea to have a shareholders’ agreement
Although a shareholders’ agreement isn’t a legal requirement, it’s a good idea to have one so you can define the rights of each shareholder, especially as they relate to each other.
Ultimately, the shareholders’ agreement gives each shareholder peace of mind about his or her responsibilities and expectations. Disagreements or conflicts can be avoided by putting everything in the agreement.
The MOI may come into play if issues go to court but a shareholders’ agreement can stop conflict from occurring.
Shareholders’ agreement template
The contents of a shareholders’ agreement must be tailored to your specific circumstances. Nonetheless, a template is a good way to start.
For reference, a free South African example is available here:
The following international templates may also be helpful if you’re currently involving in drafting a shareholders’ agreement:
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