Shareholder Agreements and their Importance in Dispute Resolution

The Companies Act 71 of 2008 (the “Act”) was introduced on 1 May 2011, and one might have thought that this could trigger a decline in the use of Shareholder Agreements. However, these agreements are still widely used in South Africa, despite the fundamental changes implemented by the Act.

A Shareholder Agreement is a contract between a shareholder and a company, or between shareholders themselves. The purpose of the agreement is not only to regulate various aspects of the business, but also to provide a means of protection to shareholders.

The Act stipulates that Shareholder Agreements may no longer incorporate provisions that vary from a company’s Memorandum of Incorporation, or from the Act itself. The Act clearly states that any provision in a Shareholder Agreement which is inconsistent with the Act or with the company’s Memorandum of Incorporation, is in fact void to the extent of such inconsistency (Section 15(7) of the Act).

Whilst it is not a requirement to have a Shareholder Agreement, it is worthwhile having one in place as relationships go well until disagreements set in. Having a well-drafted Shareholder Agreement in place can prevent or minimise future disputes, by documenting specific processes for managing conflicts, should they arise.  

Dispute provisions, which are of importance to shareholders, should include the following:

• Pre-emptive rights;
• Lock-in;
• Put and call options;
• Tag-along;
• Come-along;
• Deadlocks; and
• Exit Plan.

These provisions help protect the ongoing operations of the business and provide certainty and comfort to the shareholders in the unfortunate event of relationship deterioration. In serious cases, a Shareholder Agreement can also be utilised to keep matters out of Court, until the mutually agreed resolution processes have been exhausted.

The bottom line is that proactive preparation of a Shareholder Agreement could potentially save time and frustration for shareholders in years to come.