SHAREHOLDERS AGREEMENT – YES OR NO?

Since the inception of the new Companies Act it has been held that shareholders agreements have become somewhat redundant. This cannot be further from the truth.

Yes, previously a shareholder’s agreement seemed more important since the provisions thereof would prevail over the provisions of the companies act and the company’s memorandum of incorporation (previously called the articles of association) (“MOI”) in the event of any conflicting provisions. Since the implementation of the new companies act, the position has changed and now the provisions of the new companies act, and the MOI will take preference over the provisions of the shareholders agreement in cases of conflict.

Despite this, The provisions of the companies act, and the MOI mostly regulate the duties and responsibilities of directors owed to the company (and to shareholders), whereas a shareholder’s agreement regulate the relationship, rights and responsibilities of shareholders between themselves.

Aspects such as what happens to you’re a shareholder’s shares in the case of him dying or being declared mentally ill or being sequestrated. How do you value the shares? Do the shareholders have a first right of refusal? Are there tag-along or drag-along clauses to provide for minority shareholder protection? How are shareholder loans dealt with? How are disputes between the parties dealt with?

Having a written agreement which regulates the rights and responsibilities of the shareholders towards one another and which deal with certain obligations flowing from a variety of pre-empted events that may happen during the subsistence of your business relationship, will not only alleviate any disagreement or argument that may follow, but will also provide greater certainty to all shareholders.

It is worth mentioning, it is always best to negotiate the terms and enter into an agreement before you commence with that business relationship.