Setting up a business with multiple owners? Drawing up a shareholders agreement is probably one of the most important documents for your business to move forward.

Read on to get an idea of what a shareholders agreement is and why you should set one in place from the outset of your business.

What is a shareholders agreement?

what is a shareholders agreement

A shareholders agreement governs shareholders and their relationship to one another and to the company. A shareholders agreement lays down specific rules determined by shareholders about the internal management of the company.

Why do you need a shareholders agreement?

Does every company need a shareholders agreement? If you have more than one shareholder, then you should have a shareholders agreement. As your business grows and your commitments increase, you will need something similar to an insurance policy for when your business comes to issues such as:

  • how to resolve disputes between shareholders
  • disputes arising over director appointments, company governance, money spent, or dividend policies
  • events of default
  • disagreements on pricing or market value when business partners wish to sell their shares and exit the business
  • a founding shareholder wanting to bring in another partner or investor for capital injection
  • pre-emptive rights – i.e. restricting a transfer of shares potentially requiring exiting shareholders to offer their shares to existing shareholders first, before the shares are offered to outside third parties
  • involuntary exits – such as a shareholder dying or suffering total and permanent disability
  • share valuation methods upon an exiting shareholder

While the legislation and common law applies, they only set out default or one-size-fits-all rules to govern shareholder and director rights and responsibilities. A shareholder agreement can provide tailored resolution methods for disputes among shareholders as well as dissolution procedures for when there is no mending the business relationship.

What should a good shareholders agreement contain?

When drafting a shareholders agreement, make sure that it covers:

  • control and management of the company
  • duties and obligations of directors and shareholders
  • shareholder involvement in company meetings and decision making
  • the appointment and removal of directors
  • policies for distributing dividends
  • sales and transfers of shares and related restrictions, pre-emptive rights
  • procedure for capital injections
  • exit strategy for founding shareholders
  • the power to appoint a director to the company for major shareholders
  • liquidation preferences
  • anti-dissolution clauses
  • restraint on existing shareholders i.e starting a new business in the same line of work as your company
  • voting in director’s and general meetings
  • the type of shareholding e.g. preference shares, ordinary shares and the rights attached to those shares
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Frequently Asked Questions About Shareholders Agreement

1. Does a shareholders agreement need to be registered?
Generally, there is no need to register the agreement but it comes in handy when you’re creating a register of shareholders. Make sure your agreement contains information such as the name, address, and shares held by each shareholder.

2. Does a shareholders agreement override company constitution?
In general, a shareholders agreement will prevail to the extent of any inconsistencies in a company constitution.

3. How many shareholders can I have?
All companies must have at least one (1) shareholder. A private company (Pty Ltd), however, can only have fifty (50) shareholders.

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An ounce of prevention is worth a pound of cure.

Whether you’re starting a new business with other people or buying into an existing business, we at TNS Lawyers can tailor shareholder agreements to aid you in managing internal conflicts such as disputes, shareholder oppression, etc. whilst protecting the immediate and long-term interest of all parties.

For enquiries regarding shareholders agreements and other aspects of corporate law, connect with us via phone on 03 9052 3214 or by filling out the form below.