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Explanatory Notes
South African Shareholders Agreement
EXPLANATORY NOTES Normally the Articles of Association govern the relationship between shareholders and the company and third parties. However, these are standard terms and often shareholders are participating in a company to achieve a particular object and want to regulate their affairs between each other in a specific manner relevant to the circumstance of the enterprise. Thus, for instance, the company may consist of four shareholders each of whom wishes to ensure that no Resolution can be taken by any three others which will cause prejudice to him. Such matters can be specified as requiring a specified majority i.e. not less than say 76%. The precedent used is one which can best be adapted for use where a venture is being undertaken by a number of persons all of whom are equally or differently involved in a full time or part time capacity as may be provided for. In other words it is like a partnership but registered as a company. Thus, for instance, each shareholder is also a director. 1. DEFINITIONS
The definitions spell out what the various terms used in the contract mean; 2. SHAREHOLDINGS
The exact shareholding of each of the parties as specified and what it is intended that each of the directors will contribute to the operations of the company. 3. ARTICLES OF THE COMPANY
This ensures that what the parties specifically agree between themselves takes precedent over the standard provisions of the Articles of Association which Articles are provided for in terms of the Companies Act being either a Table A or Table B (public or private) type company. 4. FINANCING THE BUSINESS OF THE COMPANY
4.1 It is important to provide from the outset how the company will raise finance. If outside banks and third parties are to be looked to, it is likely that the bank or third party will require the directors to sign suretyships. Clause 12 thus provides that while no shareholders are obliged to guarantee monies lent to the company, a shareholder that does so is indemnified by the other shareholders pro-rata to their interests in the company. If shareholders are not required to provide working capital clause 5.2 can be amended by deleting the words "will provide working capital in the sum of R[ ] as follows: but will otherwise" so that it continues with the words "will not be obliged ………" 4.2 Shareholders are not entitled to cede their rights to claim payment of monies advanced to the company to third parties without other shareholders consent so as to ensure that no outsider can without their knowledge demand repayment of such monies. To the extent loan accounts are out of proportion to shareholdings, dividends are required to be adjusted accordingly. 5. SHAREHOLDERS ENTITLEMENT
This provides that on liquidation the shareholders will, if there are any monies available for distribution, receive an amount pro-rata to their shareholdings. 6 DIRECTORSHIPS
The company set up is of a joint venture nature whereby each of the shareholders participates in the affairs of the company and as such is also a director. 7. QUORUMS AND RESOLUTIONS
A quorum of directors or shareholders is required to consist of not less than 50% of the value of the issued share capital of the company i.e. it can't just be two out of four directors if they as shareholders hold less that 50%. 8. MATTERS REQUIRING THE SPECIFIED MAJORITY
As reflected at the beginning of these notes this clause provides protection to other directors / shareholders in regard to Resolutions which are material to the company's operations. The list is a fairly extensive list and should be cut down to the extent necessary. 9. PRE-EMPTION AND TRANSFER OF SHARES (Clause 10) 9.1 Disposal to a third party
The principle provided for in this clause is that no shareholder can sell to a third party unless he has first given the present shareholders an opportunity to purchase at a particular price and on particular terms. If none of the shareholders purchase all of the shares of a shareholder then that shareholder will be entitled for a specified period to sell to any third party on exactly the same terms provided that third party agrees to be bound by the provisions of the Shareholders Agreement. 9.2 Texas Auction
This provides for any shareholder being able to make an offer to purchase all the shares of any other shareholder and should the offeree shareholder fail or decline such offer, the offeree shareholder in turn will have a similar right to purchase the shares for a specified period of time. 9.3 Forced Sales
This provision relates to where a person is sequestrated or acts in a particular manner i.e. fraudulently forcing him to dispose of his shares pro-rata to the other shareholders at a price determined by the auditor of the company as being the fair market value thereof. 9.4 Come Along
This provides for a shareholder (generally being a shareholder holding in excess of 51% but no so provided for in this Agreement) who on receiving an offer from an outsider, is required to offer his shares for sale to the other shareholders on the same terms and conditions failing which the other shareholders will be required to likewise dispose of their shares to such third party. 9.5 Disposal on Death
Finally on the death of a shareholder his estate is entitled to be paid the fair value thereof as determined by the auditor. 10. EMPLOYMENT (Clause 15)
Where a particular director is employed on a full time basis this clause can be inserted and completed. 11 RESTRAINT OF TRADE (Clause 16)
This provides that shareholders / directors are not entitled to undertake any activities that compete with the company while he is a shareholder. The 'Territory' can be as wide as the whole world or more appropriately the area within which the company has established a reputation. The smaller the area is the more probable that a Court will enforce the Restraint of Trade. Restraints are notoriously difficult to enforce in the sense that, while having signed such a document one is bound in South Africa by one's agreement, at the end of the day the Court has to be satisfied that there is a proprietary right which the enforcer is entitled to protect by way of the Restraint. If there is no such proprietary right, i.e. a list of customers built up over the years, then the Court will not enforce the Restraint.
12. CONFIDENTIALITY (Clause 17)
The same type of provision is made in regard to confidentiality namely that the shareholders are required to keep confidential all confidential information of the company and not to disclose it to any third party. 13. FAMILY COMPANIES, TRUSTS OR CONNECTED PERSONS (Clause 19)
This provides that any shareholder is entitled to transfer his shares to other family entities and in particular companies, trusts or relatives up to the fourth degree of consanguinity i.e. children of cousins. 14. DOMICILIUM (Clause 20)
This is a very important clause in that it ensures that if any notice is required to be given or any legal documents served it will be deemed to be properly served if served at the address chosen whether or not the person in question is living or to be found at that address. Otherwise it is often impossible to effect service because a person disappears and a notice or Summons or other legal document can then never be effectively served. 15. DISPUTE (Clause 21)
This is also a very important provision in that it provides for an easy and inexpensive means of resolving disputes that occur between shareholders. Often resort is had to arbitration which is extremely time consuming and expensive and involves reference to lawyers.
16. VARIATIONS (Clause 22)
Likewise an important clause in that is it often contended that other oral agreements were entered into between the parties at the same time as the written Agreement was entered into. This clause provides that only what is in the Agreement will bind the parties and that anything else is irrelevant. Likewise no variation or cancellation will be of any effect unless in writing. 17. GOVERNING LAW (Clause 25)
As the Agreement is subject to South African law it is important for all the parties even if they live outside South Africa to consent to the jurisdiction of a particular Court and of course the applicable law.
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