A Shareholders’ Agreement is a crucial company document, for many reasons. First and foremost, it regulates the relationship between the parties as well as aspects such as cash injections and shareholder loan repayments. It also deals with rights of first refusal.
In its absence, the Companies Act 71 of 2008, as amended, does not afford much guidance. As such, it is a crucial clarifying document. In addition, it also regulates exit – either when this happens voluntarily or is triggered by some other event.
So, what makes a good shareholders’ agreement?
1It stipulates a clear methodology of valuation of your shares
It is important to outline the method of determining the value of shares. In addition, if you cannot reach an agreement, that there is a mechanism for dealing with that eventuality.
Broadly speaking there are two methods – the one is a “snapshot” of the current state of affairs in the company – in other words fair value. The other is a “forward thinking” exercise that includes goodwill as well as future projections.
Where there is disagreement on the method to be used, a useful provision is often to nominate someone like the company auditor or an independent person to do the calculations.
2Deals with voluntary exit
In other words, you have a process to follow if you want to exit or leave the company and sell your shares.
It is important that you understand the process and follow it exactly when the time comes. Importantly, the rights of first refusal or put differently – who to offer to first and how to go about that is crucial.
3Exit when the unforeseen happens
These agreements often include provisions such as illness or death, which trigger certain provisions and ultimately exit. This usually works together with insurance policies, and a buy and sell agreement.
Good contracts are all about clarity. So, it is important to decide the value of the investment in the company and how it will be measured going forward.
Then to deal with exit aspects whether voluntarily or not. It is crucial for businesses to have this in place when you are more than one shareholder.