A Company's Shareholders' Agreement that is not drafted in line with its own Memorandum of Incorporation and the Companies Act, No 71 of 2008 is void to the extent of the inconsistency. Such a Shareholders' Agreement is unenforceable between the Company and the Shareholders, and between the Shareholders themselves.
Section 15(7) of the Companies Act, 2008 expressly provides that the Shareholders of a Company may enter into any Agreement with one another concerning any matter relating to the Company, subject to the proviso that any such Agreement must be consistent with both the Companies Act, No 71 of 2008 and the Company’s Memorandum of Incorporation (MOI), and the Agreement may only cover matters relating to the Company.:
S 15(7) now renders clauses in an Agreement which override a Company’s MOI, unenforceable. There are no exceptions or exemptions regarding s 15(7).
When drafting a Shareholders' Agreement, the following should be borne in mind:
- Firstly, it must be determined which are the unalterable provisions of the Act. These provisions are prohibited from being overridden in a Shareholders' Agreement. For instance, s 35 is an unalterable provision which states that a share issued by a Company is movable property, transferable in any manner provided for or recognised by the Act, read with s 38, which states that the Board of the Company may resolve to issue shares of the Company at any time but only within the classes and to the extent that the shares have first been authorised in terms of the Company’s MOI in accordance with s 36. Shareholders have to invoke s 15(2) to include in both the MOI and the Shareholders’ Agreement a provision that Shareholder approval of any share issue is required in the event that the Board resolves to issue shares; with the result that a Shareholders’ Agreement can no longer provide that any issue of shares may be made without the agreement of the Shareholders of that Company.
- Secondly, it must be determined which of the alterable provisions of the Act must be altered in both the MOI and the Shareholders’ Agreement to accommodate the requirements of the Shareholders. Most of the alterable provisions are found in Chapter 2 of the Act which have been designed to accommodate the small Company and its corporate governance provisions.
- The Company itself can be a party to a Shareholders’ Agreement. There is nothing in the Act which prohibits a Company from being a party to an Agreement amongst all or some of its Shareholders.
- A Shareholders’ Agreement can provide for the appointment and removal of Directors by way of a Shareholders’ voting pool. Neither the Act nor the common law restricts the manner in which a Shareholder may exercise the voting rights attached to the shares held by that Shareholder. For example, the Agreement can state that the Shareholders irrevocably undertake to exercise all their voting rights at Shareholders’ Meetings in favour of the election or removal, as Directors, of the persons nominated by another Shareholder.
- There are no provisions of the Act which prohibit minority protections, being provisions that, for example, give a minority Shareholder the right to veto a proposed resolution or decision of Shareholders or the Board. Accordingly, the Act does not prohibit Shareholders from agreeing contractually that they will not exercise their voting rights at Shareholders’ Meetings in a certain manner or that they will exercise their voting rights against certain decisions. Accordingly, Shareholders can incorporate such undertakings in a Shareholders’ Agreement. Importantly, however, it is not possible to bind the Company to such provisions unless they are incorporated in the MOI. Voting Agreements are used by two or more Shareholders to provide for the manner in which they will vote their shares when exercising voting rights. Voting agreements have long been recognised at common law under the previous company law regime. In this regard, it was held that a shareholder’s right to vote is a proprietary right that the shareholder may exercise in any way he pleases and with regard, not to the company’s interests, but to his own interests as a shareholder. Shareholders, unlike directors, owe no fiduciary duty to the company to act in the best interests of the company. However, under the new Act, voting agreements may, in certain circumstances and depending on their content, fall foul of the anti-avoidance measure. This applies where the voting agreement is found to be primarily or substantially intended to defeat or even to merely reduce the effect of an unalterable provision of the Act. A voting agreement may also be required to comply with the Act and the company’s MOI, if the voting agreement is an agreement between the shareholders of a company concerning any matter relating to the company.
The Act accordingly creates flexibility for supermajority voting requirements and minority Shareholder protection under Shareholder Agreements, provided that the Shareholders’ Agreement is consistent with the Company’s MOI on these matters.
- Directors’ decisions must be handled differently because the law does not permit a Director’s discretion as to the manner in which the Director will exercise his votes at Board Meetings to be fettered in any way. This principle is absolute in the sense that it applies to every Board decision or resolution, no matter what its subject matter may be. As in the past, all that a Shareholders’ Agreement could provide is that the Shareholders will use their best efforts and take whatever actions may be lawfully taken in order to procure that their nominated Directors exercise their votes at Board Meetings in accordance with the terms of the Shareholders’ Agreement. The new Companies Act requires that these Directors’ decisions must be reflected in the Company’s MOI and no longer solely in the Shareholders’ Agreement.
- S 46, which governs distributions and which, for the first time, permits the Board to authorise any distribution (including an interim or final dividend), is an ‘unalterable’ provision. However, s 15(2)(a)(iii) permits the MOI to include any provision imposing on a Company a ‘higher standard’ or ‘greater restriction’ than would otherwise apply to a Company in terms of an ‘unalterable’ provision of the Act. Accordingly, it is quite lawful to include in the MOI a provision to the extent that any distribution which is authorised by the Board in terms of s 46 cannot be implemented without the prior approval of a Shareholders’ resolution. Such a clause has no legal effect unless it is incorporated in the MOI. This principle applies to most of the other ‘unalterable’ provisions of the Act, such as share buy-backs.
- There is no restriction on inserting a so-called ‘anti-dilution’ clause, such as pre-emptive rights on share issues, in a Shareholders’ Agreement. In fact, the reverse applies in the case of private companies and personal liability companies, if it is agreed by the Shareholders of a private Company or a personal liability Company that they will not have pre-emptive rights on share issues, the MOI must include a provision that s 39 shall not apply in relation to any issue of shares by that private Company or personal liability Company. Offers of securities which a Company proposes to issue to the public are strictly regulated by Chapter 4 of the Act. In all other instances which involve an issue of securities, the Shareholders, or the Shareholders and the Company, are free to incorporate their respective rights and obligations on these matters in a Shareholders’ Agreement.
- Pre-emptive rights, ‘tag along’, ‘drag along’, deemed sales or offers of shares and similar clauses which govern the rights of Shareholders amongst one another in relation to sales or disposals of shares are not restricted by the Act in any way. Shareholders, as well as Shareholders and the Company, can incorporate these important provisions in a Shareholders’ Agreement.
Advantages of a Shareholder’s Agreement
- Firstly, a Shareholders’ Agreement is a private document. It is not filed with the Companies Commission and is not available for inspection by the general public.
- Secondly, the binding force of Shareholders’ Agreements stem from the normal principles of the law of contract. S 15(6), with its complexities and limitations, governs only the legal status of the MOI and the Company Rules; it does not extend to Shareholders’ Agreements.
- It is of the utmost importance that Shareholders’ Agreement is updated and drafted in compliance with the Companies Act of 2008, Companies Amendment Act of 2011 and Companies Regulations and the Company’s Memorandum of Incorporation in order to have full force and effect.
- A new customised Shareholders’ Agreement ensures that the following provisions, inter alia, are dealt with:
- Shareholders’ resolutions; Shareholders’ meetings and notice of meetings; quorum, conduct, postponement and adjournment relating to meetings; transfer of shares; pre-emptive rights of Shareholders; admission of new Shareholders; encumbrances of shares and claims; come along and tag along clauses; relationship of the parties; deemed offers; breach, warranties and representations; release from surety obligations; an appropriate valuation method is identified in the Agreement in relation to various disposal transactions and a Buy and Sell Agreement is included to facilitate the financing of the disposal transactions.
OnlineMOI provides an online customised Shareholders Agreement that is fully compliant with the 2008 Companies Act and the Memorandum of Incorporation, and includes a Buy and Sell Agreement.
Register your free OnlineMOI account at www.onlinemoi.co.za
See Extra Docs for the Pre-Shareholders’ Agreement Client Questionnaire (English and Afrikaans).