Shareholder Agreement Non-Negotiables

Shareholder Agreement Non-Negotiables 

we had this article in our exam)

Shareholder Agreement Non-Negotiables


Good fences make good neighbours, and when it comes to
business, good shareholder agreements make good
partnerships. 

Not only does a shareholder agreement outline
what each party agrees to, but it offers crucial protection for you,
your partner and your business in the event of unforeseen
circumstances. And let’s face it, no one goes into a partnership
foreseeing the circumstances that will end that happy union.
A shareholder agreement deals with the relationship between
shareholders and the relationship of shareholders with the
company.

It deals with the ownership of shares, the disposition and
alienation of shares, the management of a company, meetings of
shareholders and directors, voting rights at such meetings, the
composition of the board of directors and the dividend policy of
the company.

A spokesman from Cliffe Dekker Attorneys, one of the largest
corporate law firms in South Africa, advises that: “The drafting of
shareholder agreements is complex and advice should be
sought from a properly qualified practitioner or firm as each case
should be evaluated and dealt with on its own merits.” The firm
has put together the following outline of what may typically be
found in a shareholder agreement.

Share capital

A shareholder agreement should deal with the share capital of a
company and must record the number and nature of shares in
issue and/or subscribed for and the number and percentage held
by each shareholder. It should also set out whether there are
different classes of shares (such as ordinary shares and
preference shares) and the rights attached to those classes.

Directors

The document should stipulate the size of the board, state which
of the shareholders is entitled to appoint directors and provide
for the removal and replacement of directors. It would also
typically include provisions relating to the quorum at board
meetings and the voting powers of directors.

Shareholding

It should outline how shareholders' meetings are to be held, what
will constitute a quorum, how proxies will be treated and what
will occur in the event of a deadlock. Some of the most important
provisions of a shareholder agreement from the perspective of a
minority shareholder are those relating to minority protections.
Generally such clauses stipulate that the directors and
shareholders will not be entitled to pass resolutions on certain
reserved matters without the consent of a specified percentage
of the shareholders. For instance, if the specified percentage is
80%, a shareholder holding 25% of the issued share capital of
the company will be able to prevent the passing of a resolution

Dividends/payments to shareholders

The dividend policy of the company should be set out in the
shareholders’ agreement – that is, the circumstances under
which a company will declare dividends. It is often provided that
a company will not declare dividends if it owes any amount on
a loan account to its shareholders or if it is indebted to any third
party lender.

Management

The management provisions of a shareholder agreement usually
state who is responsible for the day-to-day management of the
company (overall responsibility for the management of the
company resides with the board of directors), the identity and
appointment of the managing director and senior executives, the
manner in which the annual budget of the company is approved,
the appointment of the auditors of the company, how the audit of
the company will be conducted, the furnishing of management
accounts and reports to the board and the shareholders.

Transfer of shares

A shareholder agreement usually provides for ‘rights of first
refusal’, otherwise known as pre-emptive rights, which means
that if a shareholder wishes to dispose of his shares, he first has
to offer them to the remaining shareholders at the price he has
been offered for them by an outsider. He is not allowed to sell to
the outsider at a lower price or on better terms than those offered
to the remaining shareholders.

Deemed offer

The deemed offer, or forced sale, provisions of a shareholder
agreement play an important role. For instance, the shareholder
agreement can state that if the BEE level of shareholders is
reduced below a certain level, the shareholders will be deemed to
have offered to sell their shares to the other shareholders on the
occurrence of the event which led to the reduction of the BEE
level. The deeming provisions can also stipulate other trigger
events which can give rise to a deemed offer (such as
insolvency, change of control, the resignation of an executive
who is also a shareholder). These provisions should also state
how the purchase price will be determined in the event of a
deemed offer.

Come-along / Tag-along

Shareholder agreements often include clauses which provide
that under certain specified circumstances, where majority
shareholders sell their shares, the minority shareholders can
arrange to be bought out on the same terms (tag-along). The
come-along clause states that if majority shareholders wish to
sell their shares to a third party who wants to purchase 100% of
the share capital of the company, the majority shareholders can
require that the minority shareholders also sell their shares on
the same terms.

Other Provisions

Shareholder agreements contain various other provisions,
including provisions relating to breaches of the agreement, the
remedies for such breaches and dispute resolution.