One of the best ways for shareholders to protect their interests is to enter into a shareholders agreement. Such an agreement sets out the rights and obligations of each shareholder in detail. These agreements also include information and guidelines regarding the management of the company.
What are shareholders agreements?
A shareholders agreement, also referred to as a stockholders agreement, is an arrangement among a company's shareholders that describes how the company should be operated.
When negotiating a shareholders agreement, it is important to bear in mind that each shareholder may have different motivations for concluding such an agreement. These motivations are based on several factors, such as the percentage of shares that is being held by a shareholder as well as the respective duties of the shareholder.
What are the benefits of a shareholders agreement?
There are many benefits to having a proper shareholders agreement which has been reduced to writing, a few of which are listed below:
- The agreement reduces the risk for potential future disputes.
- It regulates and stipulates the duties of each party.
- It deals with the sale of shares to outside parties.
- It deals with the repayment of loan accounts.
An argument can be made that, since a shareholders agreement cannot prevail over the Companies Act 71 of 2008 or the Memorandum of Incorporation of the company, a shareholders agreement is not important to have.
This argument would however be fallacious since there are many issues that are not dealt with in the Companies Act or the companies Memorandum of Incorporation that needs to be addressed in a shareholders agreement. These issues include, but are not limited to, shareholding, pre-emptive rights and alternative dispute resolution.
Thorough shareholders agreement offers protection
In conclusion, a well drafted and thorough shareholders agreement is important as it can be used by the shareholders as a form of protection to protect their interests and enforce their rights. The fact that the agreement is in writing means that parties cannot later vary the terms and conditions of such agreement unilaterally in an effort to escape their obligations.
Originally published July 22, 2019
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