A restraint of trade is an agreement between employer and employee wherein, upon termination of employment and in order to safeguard the employer from unlawful competition, the employee agrees to a restriction of its trading activities.
An employer’s intention to restrict an employee’s trading activities must be clear and unambiguous, as such the agreement must be voluntary, with an understanding of the repercussions that will exist should the contract be breached.
The ambit, area and period of the restraint must be reasonable, justifiable and cannot be against public policy. In other words: To restrain one in his/her professional capacity is unreasonable. However, to restrain a professional from working for a competitor, or in the same or similar industry as the current employer is reasonable. Further, Where ever the employer conducts its business it is deemed reasonable to prevent the employee from working with a ‘like’ company/competitor in the same geographical area. And, provided the employee is paid during the period of restraint then a year restraint of trade will not be seen as unreasonable.
In deciding on the validity of a restraint the courts must balance the competing interests of the employee’s freedom to earn a living with the employer’s right to protect its proprietary interest. For a restraint to be unenforceable a party must clearly show that the effect of the contract was to cause the sterilization of services without any justification for the protection of the employer’s business interests.
Is the restraint reasonable?
Ask the following questions to find out if your restraint of trade is reasonable:
- Does one party have an interest that deserves protection after termination of the agreement? If so, is that interest threatened by the other party?
- In that case does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive or unproductive?
- Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?
Where the interest of the party sought to be restrained weighs more heavily than the interest to be protected the restraint is unreasonable consequently unenforceable.
Should you require any further assistance please do not hesitate to contact me on email@example.com
5 Tips For Ensuring Minority Shareholder Protection
The following tips may help you secure your position.
Minority shareholders are often faced with the challenge of entrenching their rights in a company and making sure their voices are heard. Although there are certain statutory protections that are afforded to them, minority shareholders can request that certain additional protections are included in a company’s constitutional documents which will afford them even greater protection.
If you are going to be a minority shareholder in a company (that is, you will hold less than 50% of the shares in the company), the following tips may help you secure your position:
1. Include rights of pre-emption
Rights of pre-emption can be included for further issues of new shares by the company and sales of shares by shareholders. In respect of the issue of new shares by the company, it is important that a company’s constitutional documents contain a right of pre-emption in terms of which the company is obliged to first offer shares to the existing shareholders pro rata to their shareholding in the company, before being offered to a third party. This prevents minority shareholders’ shareholding in the company from being further diluted.
Although the Companies Act does include this statutory protection, companies are entitled to amend this provision in their constitutional documents and exclude this protection. Minority shareholders are therefore advised to ensure that this protection is entrenched in the company’s constitutional documents.
Similarly, it is important that a company’s constitutional documents contain a right of pre-emption in respect of the sale of existing shareholders’ shares. Ideally, shareholders who wish to dispose of their shares are obliged to first offer their shares to the existing shareholders pro rata to their shareholding in the company, before being offered to a third party for sale. This protects existing shareholders (including minority shareholders) from having a new (and possibly unwanted) shareholder being foisted upon them.
2. Provide for “specially protected matters”
It is important that a shareholders’ agreement and/or memorandum of incorporation contains a list of “specially protected matters” which require approval by shareholders holding a specified threshold (typically at least 75%) of the shares in the company.
Put differently, a list of possible transactions or eventualities should be drawn up which require that minority shareholders vote on them before they are actioned. Although the Companies Act does contain a statutory list of matters requiring the approval of shareholders holding at least 75% of the issued share capital, this list can be amended to include additional matters and the required threshold can also be increased.
A material change in the nature of the business, the encumbering of the company’s assets, and appointment of senior executives earning above a certain amount would typically be included in this extended list.
3. Ensure representation at board and shareholder level
For minority shareholders, ensuring representation at shareholders meetings is most critical. Minority shareholders can request that the constitutional documents require their representation at a shareholders meeting for a quorum to be validly constituted.
In respect of board meetings, minority shareholders can request that the constitutional documents provide that they are entitled to make a nomination for appointment to the board and require the other shareholders to vote in favour of such nomination. Minority shareholders can also request that the constitutional documents provide that for so long as they hold not less than a specified threshold (for example, 1%) of all the issued shares, they are entitled to nominate one person for election to the board.
Alternatively, minority shareholders can request observer rights in terms of which they are entitled to appoint one observer to attend meetings of the board, who may observe proceedings at board meetings, but not speak or vote.
4. Insist on a “tag along” clause
It is important that a shareholders’ agreement and/or memorandum of incorporation contain what is known as a “tag along” clause. A tag along clause means that if a third party (A) offers to purchase equity in the company from a group of shareholders (B) but not the remaining shareholders (C), then C can insist that B only sells shares in the company to A if A acquires C’s shares on the same terms.
This ensures that minority shareholders are afforded an opportunity to participate in any sales which the majority shareholders participate in and that minority shareholders are not forced to remain as shareholders in a company with a new majority shareholder.
5. Conclude a “voting pool” agreement
So-called “voting pool” agreements allow minority shareholders to agree with one another on “block voting” in terms of which they pool their shares and vote collectively on matters, thereby strengthening their voting position in the company.
Dealing With Decision – Making Deadlocks In Private Companies
Effective decision – making is an important part of running any Business or Company.
In essence, Companies are governed by the democratic principle on both Shareholder and Board level. This means that the majority rules both on Shareholder and on Board level. What is important to note though, particularly on Shareholder level is that besides the underlying asset value particularly in Private Companies, the ability to exercise effective control over the business and its assets by being a Majority Shareholder carries considerable economic value. Conversely Minority Shareholding, although Minority Shareholders enjoy increased protection under the new Companies Act 71 of 2008 as amended, carries a lesser economic value and is often difficult to market and sell to Third Party Buyers. For this reason, Majority Shareholders are often reluctant to relinquish the effective control they hold.
The role of a Shareholder and Director are distinctly different from one another as will be investigated briefly through this article. Sound governance principles are in writer’s view key in avoiding decision – making deadlocks on both levels and further, to maintain healthy relationships between Shareholders and Board members.
The distinction between Shareholders and Directors
Shareholders own shares in the Company. They are therefore Investors who are key in making certain decisions. Directors on the other hand, are Members of the Board and attend to the day- to- day running of the Company. Both Board and Shareholder decisions are made by way of resolution.
Shareholder and Director decision- making
Shareholder votes are directly correlated to the amount of shares they own in the Company. Directors on the other hand, generally only have one vote each and resolutions are taken on majority vote.
It is important to distinguish which decisions are for the Board and which are for the Shareholders. The Memorandum of Incorporation (“MOI”) is instrumental in outlining this.
There are two types of resolutions in Shareholder meetings, ordinary and special resolutions. Generally speaking, ordinary resolutions require a 50% support and special resolutions 75%. Accordingly, more sensitive decisions are taken by special resolution. Section 65 of the Companies Act lists special resolutions for Shareholders. Examples include amending the Company’s (“MOI”), to approve the issue of shares and entering into fundamental transactions. This in addition to any matter prescribed to be considered by special resolution in the Company’s MOI.
Proposed resolutions must be sufficiently clear and accompanied by information enabling the Shareholder entitled to vote whether or not to vote in favour thereof. If this is not the case, the Companies Act prescribes that such a Director or Shareholder may request such information or explanation regarding a proposed resolution. If it is still insufficient a Shareholder may, before the start of the meeting, “seek leave to apply” to Court for an order restraining the Company from putting the matter to the vote and requiring the Company to amend the proposed resolution to comply with the requirements. Importantly, the above remedy cannot be applied after the meeting has taken place.
What happens in a deadlock
A deadlock is a situation, typically one involving opposing parties, in which no progress can be made. In essence this means that equal amounts of votes are both for and against a decision.
Deadlocks can be easily avoided in Shareholder’s meetings by dividing the shareholding in such a way that all combinations lead to a majority vote or casting vote. This of course does not ensure that all decisions or processes will be dispute- free, but at least avoids the clear threat of a deadlock when a Company is owned by for example two Shareholders each holding 50% of the shares.
Directors generally only have one vote each, however many Companies afford the Chairperson of the Board an additional vote or casting vote, usually exercised in cases of deadlock.
Where deadlocks arise on Shareholder or Board level, consultation with an Independent Expert, mediation or arbitration can aid in the breaking of a deadlock. However, where this fails, the repercussions may be devastating. In terms of Section 81 any Director or Shareholder may apply to Court for the winding up of a Company.
When deciding on shareholding allocation it is important to consider the practical and mathematical probabilities of deadlock. The underlying reasons for deadlocks are complex considerations involving in writer’s view the essence of the human experience. The most important of these considerations, is crucially that Shareholders share the same values and vision for the Company. This will safeguard the relationship between them and ultimately may aid in avoiding potential deadlocks.
Boards should be diverse and Directors only focused on acting in the best interests of the Company.
Ideally Shareholders and Directors should not be the same individuals but be two distinct bodies serving the Company. If this is not the case though, those Companies should ensure that Shareholder- Directors understand the differences in the decision-making processes and the purpose thereof.
When To Collaborate And When To Employ
To help you navigate the maze we have constructed some key questions.
Given the complexity of the labour legislation in South Africa, entrepreneurs are often reluctant to employ and rather look at other forms of agreements to achieve the same outcome. There are instances when it is more appropriate to contract in a different way, but it is important that these reasons are sound.
A number of alternatives could be plausible to consider, these include: Agency, Distribution, Independent Contractor or Supplier Agreements. To help you navigate the maze we have constructed some key questions.
Question: Is this a unilateral arrangement (to some degree)? In other words, will one party supply or provide something to th other in exchange for payment?
Required Document: Clients or customers are typically engaged by agreement, usually a form of terms and conditions or perhaps even an agreement detailing credit terms. An important provision to include is the aspect of confidentiality and data protection / security. This is crucial from both a customer and supplier perspective.
Question: Do you want to engage multiple people or organisations to sell the goods or services you supply?
Required Document: An agency agreement could either relate to an individual or an organisation. This means an individual or a business could represent the supplier of the goods or services and earn a commission or remuneration for actual sales. One of the advantages is that this does not create the commitment usually associated with an employment relationship, however, a number of aspects should be carefully considered or constructed including the agent’s powers of representation and some checks and balances should ideally be in place to ensure that these are not exceeded. The process of adjusting commissions in certain instances such as customer complaints or returns.
Question: Do you sell and market goods? Are you concerned about multiple people or organisations selling the goods you supply, overstepping? Rather prefer that the goods be purchased and delivered to the end consumer from there?
Required Document: A distribution agreement detailing the price to be paid, passing of risk, storage and logistics. This is usually a more appropriate arrangement for a larger scale manufacture or export business. It could also be suitable (where logistics and storage would be less important) for software products.
4. Independent Contractor
Question: Have you contracted with an organisation and require a skill you don’t have, to perform the contract only for purposes to finish the contract or project involved? There is no need for the person only working for you.
Required Document: An independent contractor agreement detailing remuneration and term being linked to the contract or project. There is a fine line between these arrangements, labour broking and employment. It is therefore crucial to understand the risks involved and to seek professional guidance when electing to proceed this way.
It is best to strategically assess your risks, intentions and needs before electing which agreement to use. Contact an expert at SchoemanLaw today.
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