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A shareholders' agreement is an essential document for any company that issues shares. HGG Consult can help you set up this important document and also explain what it is designed to do.

What is a shareholders' agreement?

A shareholders' agreement is – as the name suggests – an agreement between the shareholders of a company. "The purpose of a shareholders' agreement is to protect the shareholders' investment in a company, establish a fair relationship between the shareholders, and to determine how the company is run," says Casper Marais, director of HGG Consult.

A shareholders' agreement will typically:

  • stipulate the rights and obligations of the shareholders;
  • regulate the sale of shares in the company;
  • describe how the company is run;
  • provide protection for minority shareholders; and
  • set out how important decisions are made.

What are the benefits of a shareholders' agreement?

  • Minority shareholders: Without a shareholders' agreement, a minority shareholder (one owning less than 50% of the shares) will have little control or say in the running of the company. Having a shareholders' agreement that includes the requirement for all shareholders to approve certain decisions ensures that all shareholders have a say in important decisions.

    "A provision may also be included that if someone is willing to buy the shares of a majority shareholder, that shareholder can only sell the shares if the same offer is made to all shareholders, including minority shareholders," says Casper.
  • Majority shareholders: A shareholders' agreement can contain provisions that prevent minority shareholders from passing on confidential company information to competitors or setting up rival businesses.

    Another concern is the transfer of shares to other parties by minority shareholders. This could cause problems if the sale is to a competitor or someone else you do not want involved with the company. "A shareholders' agreement can therefore stipulate the procedures to be followed when shares are transferred or sold," adds Casper.

CHECKLIST: What should be in a shareholders' agreement?

A shareholders' agreement should contain stipulations which govern the following:

  • The issue and transfer of shares – including provisions to prevent unwanted third parties from acquiring shares and how a shareholder can sell shares.
  • Protection to holders of less than 50% of the shares – including the requirement that certain decisions are to be agreed on by all shareholders.
  • Running the company – including appointing and removing directors, making large capital outlays, financing the company, etc.
  • Paying dividends – how often dividends are paid, how they are decided on, etc.
  • Competition restrictions, and
  • Dispute resolution procedures.

Need help?

Contact Casper Marais at HGG Consult at (021) 851 2778 or email casper@hggroep.co.za for advice and assistance with setting up your shareholders' agreement.