What is a close corporation association agreement?
Is a close corporation association agreement legally binding in South Africa?
“The members of a corporation having two or more members may at any time enter into a written association agreement signed by or on behalf of each member, which regulates— (a) any matter which in terms of this Act may be set out or agreed upon in an association agreement; and (b) any other matter relating to the internal relationship between the members, or the members and the corporation, in a manner not inconsistent with the provisions of this Act (s 44(1)). The following rules in respect of internal relations in a corporation shall apply in so far as this Act or an association agreement in respect of the corporation does not provide otherwise (s 46).”
“The object of section 49 is to come to the relief of the victim of oppressive conduct. The section gives the court the power to make orders ‘with a view to settling the dispute’ between the members of a close corporation if it is just and equitable to do so. to this end the court is given a wide discretion. It may ‘make such order as it thinks fit’, within the framework of either ‘regulating the future conduct of the affairs of the corporation’ or ‘the purchase of the interest of any member of the corporation by other members thereof or by the corporation’. these are far reaching powers. One member can be compelled to purchase the interest of another at a fair price, whether he wants to or not.”
When you need a Close Corporation Association
- You run an existing close corporation with two or more members and want the management roles, profit split, signing authority and decision thresholds written down — instead of relying on the Act’s default of equal participation and equal management rights.
- A member is joining or leaving the CC, or a member’s interest is being sold, and you need pre-emptive rights, valuation and buy-out terms agreed in advance so the change does not trigger a dispute.
- You want to vary the Act’s defaults — for example to give one member a casting vote, set unequal profit-sharing, require unanimity for certain decisions, or restrict a member’s authority to bind the corporation.
- The members want a clear deadlock-breaking and dispute-resolution mechanism, so a fall-out does not have to escalate to a section 49 court application for relief from unfairly prejudicial conduct.
- You are buying into, lending to, or doing due diligence on a CC and need to confirm that a valid, signed association agreement exists, is consistent with the Act, and reflects the deal actually struck between the members.
- Your CC is operating without any written agreement (or on an outdated template), and the members want their understanding recorded before a death, divorce, dispute or sequestration forces the issue.
What a Close Corporation Association should contain
Parties and signature by every member
Section 44 requires the agreement to be in writing and signed by or on behalf of each member. Leave one member out and the agreement is defective — every current member (and any incoming member) must be a party, so the clause must track changes in membership.
Management, authority and signing powers
The default rule gives every member equal management rights and equal power to represent the CC. The association agreement is where you vary that: who manages what, who may sign or bind the corporation, monetary limits on authority, and which decisions need joint or unanimous approval.
Members’ contributions, interests and profit-sharing
Each member holds a percentage member’s interest. The agreement records contributions and, importantly, can split profits and losses on a basis that differs from the members’ interests — a deliberate departure from the Act’s default that must be stated expressly to be effective.
Decision-making and supermajority thresholds
Spell out what passes on a simple majority, what needs the statutory 75% of members’ interests (such as a change in the principal business or a disposal of the whole undertaking), and any matters the members agree to entrench at unanimity or a higher threshold.
Disposal of a member’s interest and pre-emptive rights
How a member may dispose of all or part of an interest, the consent required, who gets first refusal, and the valuation method. This protects the remaining members from an unwanted incoming member and gives a departing member a clear exit price.
Death, incapacity, insolvency and buy-out
What happens to a member’s interest on death, mental incapacity or sequestration — whether it passes to an heir, is offered to the other members, or is bought out — and how it is funded (for example by buy-and-sell cover). Without this the interest can fall into an estate and stall the CC.
Fiduciary duties and conflicts (s 42)
The agreement can record and reinforce — but never dilute — each member’s statutory fiduciary duties to act honestly, in good faith and in the CC’s interest, to avoid conflicts of interest, and not to take a personal benefit at the corporation’s expense, including a sensible procedure for written approval of conflicted dealings.
Deadlock, dispute resolution and exit
A practical mechanism — mediation, arbitration, a casting vote, a shotgun buy-out or an agreed dissolution route — to break deadlock without resorting to a section 49 application, which is slow, expensive and leaves the outcome to the court’s discretion.
Close corporation association agreement vs company shareholders’ agreement in South Africa
| Feature | Association agreement (CC) | Shareholders’ agreement (company) |
|---|---|---|
| Legal source | Close Corporations Act 69 of 1984, s 44 | Private contract permitted by Companies Act 71 of 2008, s 15(7) |
| Entity it governs | A close corporation (CC) registered before 1 May 2011 | A company (e.g. (Pty) Ltd) under the Companies Act 71 of 2008 |
| Who must sign | Every member of the CC (two or more members) | Only the shareholders who choose to be parties |
| Where it is kept | At the CC’s registered office, open to member inspection | Private; not filed and usually confidential |
| Ranking on conflict | Void to the extent inconsistent with the CC Act | Void to the extent inconsistent with the Act or the MOI (s 15(7)) |
| Court relief on fall-out | Section 49 — unfairly prejudicial / oppressive conduct | Section 163 — oppression / unfairly prejudicial remedy |
Common South African pitfalls
- Having no written association agreement at all. Many CCs run on a handshake, so when a member dies, divorces or falls out, the Act’s bare defaults apply — equal management, profit-sharing tied to members’ interests, and no agreed exit — and the dispute often ends in a costly section 49 court application.
- Leaving a member out, or not getting every member to sign. Section 44 requires the agreement to be signed by or on behalf of each member; an agreement that misses a member, or that is not re-signed when membership changes, is defective and may not bind as intended.
- Trying to contract out of the section 42 fiduciary duties. An association agreement cannot relieve members of their statutory duties to act honestly, in good faith and in the CC’s interest, or licence self-dealing — any term that purports to do so is inconsistent with the Act and of no force.
- Assuming the agreement protects the CC against outsiders. Limits the association agreement places on a member’s authority bind the members internally, but a member who exceeds them can still bind the corporation in dealings with a bona fide third party — the remedy is internal, against the member.
- Copying a generic or out-of-date template. A borrowed template often ignores the actual profit split, signing limits, valuation method and buy-out funding the members rely on, and may even include company-law concepts that do not fit a CC — surfacing, expensively, in due diligence or on a member’s death.
- Not aligning the agreement with how the interest devolves on death. If the agreement is silent (or contradicts a will or buy-and-sell policy), a deceased member’s interest can pass to an heir the surviving members never wanted as a co-member, freezing decision-making.
Frequently asked questions
What is a close corporation association agreement?
It is a written agreement, signed by or on behalf of every member of a close corporation, that regulates the internal relationship between the members and between the members and the CC. Section 44 of the Close Corporations Act 69 of 1984 allows members of a CC with two or more members to enter into one, and it may vary the Act’s default rules on management, profit-sharing and decision-making as long as it does not conflict with the Act.
Is an association agreement compulsory for a close corporation?
No. The Close Corporations Act permits an association agreement but does not require one, and a single-member CC cannot have one (it needs two or more members). Without an agreement the Act’s default internal-relations rules apply — equal participation, equal management and profit-sharing in line with members’ interests — so any CC with more than one member is strongly advised to put a signed agreement in place.
Can you still register a new close corporation in South Africa?
No. Since 1 May 2011 the Companies Act 71 of 2008 has prohibited the registration of any new close corporation. Existing CCs that were registered before that date may continue to exist indefinitely under the Close Corporations Act 69 of 1984 — there is no obligation to convert to a company — so an association agreement only ever applies to a pre-2011 CC.
Does an association agreement have to be registered with CIPC?
No. Unlike a company’s Memorandum of Incorporation, an association agreement is a private document — it is not lodged with CIPC. Section 44 requires the corporation to keep it at its registered office, where any member may inspect it and make copies. It binds because every member has signed it, not because it is filed on any public register.
How is an association agreement different from a shareholders’ agreement?
They do the same job for different entities. An association agreement governs the members of a close corporation under section 44 of the Close Corporations Act, and every member must sign it. A shareholders’ agreement governs the shareholders of a company under the Companies Act 71 of 2008, binds only those who sign it, and must be consistent with the company’s MOI. A CC has no MOI, so the association agreement and the Act together form its internal constitution.
Can an association agreement change how profits are shared?
Yes. The Act’s default is that profits follow members’ interests, but the section 46 rules apply only “in so far as this Act or an association agreement … does not provide otherwise.” So a properly drafted association agreement can set a different profit-and-loss split, give a member a management fee, or weight distributions — provided the variation is stated expressly and signed by every member.
What happens if members of a CC fall out and there is no agreement?
The Act’s defaults apply, which often deepen the deadlock rather than resolve it. A prejudiced member can apply to court under section 49 of the Close Corporations Act for relief from unfairly prejudicial, unjust or inequitable conduct. As confirmed in Gatenby v Gatenby 1996 (3) SA 118 (E), the court has a wide discretion — including ordering one member to buy out another — but litigation is slow and costly, which is exactly what a good association agreement is designed to avoid.
Can an association agreement override a member’s fiduciary duties?
No. Section 42 of the Close Corporations Act imposes a fiduciary duty on each member to act honestly, in good faith and in the CC’s interest, to avoid conflicts of interest, and not to take a personal benefit at the corporation’s expense. An association agreement may record and reinforce these duties, but any term that tries to dilute or remove them is inconsistent with the Act and unenforceable to that extent.
Sources & authority
- Close Corporations Act 69 of 1984, ss 42, 44, 46 and 49 (fiduciary position of members; association agreements; rules in respect of internal relations; relief from unfairly prejudicial conduct)
- Gatenby v Gatenby and Others 1996 (3) SA 118 (E) [1996] 2 All SA 33 — quoted with approval in Davidson v Cough N.O. [2022] ZAGPJHC 1007
This guide is general information, not legal advice. It reflects the law as at June 2026.