Exit provisions are among the most consequential clauses in any shareholders agreement. When a shareholder relationship works, nobody reads the exit clauses. When it breaks down, those clauses determine everything — the price, the timeline, the leverage, and whether the business survives the process.
A poorly drafted exit mechanism can destroy business value, trigger deadlock, and result in protracted and expensive litigation. A well-drafted exit framework gives each shareholder certainty about what happens if they — or any other shareholder — leaves, dies, becomes insolvent, or is removed. This guide covers every major exit scenario and how your shareholders agreement should address it.
Why Exit Provisions Matter
Shareholders do not always exit voluntarily or on good terms. Circumstances that trigger a shareholder exit are varied and often unexpected. A comprehensive shareholders agreement must address all of the following trigger events:
Voluntary resignation or sale
Shareholder wishes to exit and sell their shares to a third party or to remaining shareholders.
Death
Shares pass to the deceased estate. Executor must deal with shares in accordance with the SHA and the will.
Incapacity
Permanent physical or mental incapacity prevents a shareholder from fulfilling their role in the business.
Insolvency
A shareholder's personal insolvency may vest their shares in a trustee of the insolvent estate.
Dismissal
Where a shareholder is also an employee, termination of employment may trigger a compulsory share sale.
Deadlock
Shareholders cannot agree on major decisions. Certain deadlock mechanisms result in one party buying out the other.
Business sale to third party
A third party acquires the business or a controlling stake, triggering tag-along and drag-along rights.
Without Exit Provisions
Without contractual exit provisions, a shareholder who wants to leave must rely on the MOI, the Companies Act 71 of 2008 and whatever can be negotiated at the time. There is no general right to make the company or the other shareholders buy your shares, and no pricing certainty — which is usually slower and more costly than a well-drafted contractual mechanism.
Voluntary Exit — Right to Sell
A shareholder who wishes to exit the company and sell their shares must first comply with the pre-emptive rights mechanism set out in the shareholders agreement. This gives existing shareholders the right of first refusal before the departing shareholder can approach any third party.
Step 1: Offer to Existing Shareholders
The departing shareholder must serve a written offer notice on the remaining shareholders stating the number of shares they wish to sell and the price. The remaining shareholders have a defined period — typically 20 to 30 business days — to elect whether to purchase those shares on the terms offered. See our detailed guide on pre-emptive rights and share transfers for the full process.
Step 2: Third-Party Sale if Pre-Emptive Right Not Exercised
If the remaining shareholders decline to exercise their pre-emptive right, the departing shareholder may approach third parties — but only on terms no better than those offered to the existing shareholders, and only within a defined window (typically 90 days). Any third-party purchaser will still require the approval of the remaining shareholders unless the SHA provides otherwise.
Lock-In Restrictions
Many shareholders agreements include a lock-in period — commonly 2 to 5 years from the date of signing — during which no shareholder may transfer their shares without the unanimous written consent of all shareholders. Lock-in provisions protect the stability of the company during its formative years and are especially common in startup and early-stage company SHAs.
Compulsory Buy-Out (Drag-Along)
A drag-along clause entitles a majority shareholder — or a group of shareholders holding a specified threshold, typically 75% or more — to compel the minority shareholders to sell their shares to a third-party acquirer on the same terms and at the same price. This prevents a minority shareholder from blocking an otherwise commercially beneficial business sale. For a detailed analysis of how drag-along and tag-along clauses work, see our guide on share transfers and pre-emptive rights.
The minority shareholder protects itself through negotiating the following into the drag-along clause:
Minimum Price Guarantee
The drag-along price must meet a minimum threshold — often a specified EBITDA multiple or NAV — so the minority cannot be dragged out at a knockdown price.
Same Terms as Majority
The minority must receive exactly the same terms, conditions, warranties, and payment structure as the majority shareholder — no side arrangements that benefit the majority alone.
Independent Valuation Right
The minority has the right to appoint an independent expert to verify that the drag-along price meets the minimum threshold before the sale proceeds.
Good Leaver / Bad Leaver
The good leaver / bad leaver distinction is one of the most important — and most frequently contested — provisions in a shareholders agreement. It determines what price a departing shareholder receives for their shares based on the reason for departure. The underlying principle is simple: a shareholder who exits on agreed good terms receives full value; a shareholder who exits in breach of their obligations may receive less — within the limits the law allows.
Good Leaver
A shareholder is a good leaver when they exit on terms that the SHA recognises as legitimate and not adverse to the remaining shareholders. Typical good leaver events include:
- Death
- Permanent physical or mental incapacity
- Retirement after an agreed minimum tenure
- Mutual agreement of all shareholders
- Redundancy where the shareholder is also an employee
Price Received
Full fair value for shares, determined by the agreed valuation method in the SHA.
Bad Leaver
A shareholder is a bad leaver when they exit in circumstances that are hostile to or in breach of their obligations to the company and remaining shareholders. Typical bad leaver events include:
- Voluntary resignation within the lock-in period
- Serious misconduct or fraud
- Breach of a restraint of trade
- Competition with the company in breach of the SHA
- Personal insolvency (often listed, but subject to insolvency law — see below)
- Material breach of the SHA not remedied
Price Received
A discounted price set by a formula in the SHA — for example, a stated percentage of fair value, or the original subscription price if that is lower. There is no standard or safe discount: it must be proportionate to the harm the clause protects against.
Intermediate Categories
Sophisticated SHAs may define intermediate leaver categories — for example, a shareholder who resigns voluntarily after the lock-in period but before a long-service milestone may receive 75% of fair value rather than the full amount or the bad leaver discount. Intermediate categories reduce dispute risk by removing the binary nature of the good/bad distinction.
Enforceability Under South African Law
Leaver clauses are not automatically enforceable. Where a price discount is triggered by a breach, it may be treated as a penalty under the Conventional Penalties Act 15 of 1962, and a court can reduce a penalty that is out of proportion to the prejudice actually suffered. Not every discount is a penalty, and the commercial context matters, but no percentage guarantees enforceability. A discounted compulsory transfer can also be challenged on other grounds: public policy, employment law where the shareholder is also an employee, unfair prejudice under section 163 of the Companies Act, and insolvency law, which can override a clause that strips value from an insolvent shareholder's estate at the expense of creditors. Define the leaver events and the price formula precisely, and keep the consequences proportionate and commercially justifiable.
Financing the Buy-Out
One of the most common and most overlooked problems in shareholder exits is funding: the remaining shareholders may not have sufficient personal liquidity to pay for the exiting shareholder's shares upfront. A SHA that specifies the valuation method but says nothing about payment mechanics is incomplete. Start by deciding who is buying — the remaining shareholders or the company itself — because different legal rules apply to each. The following mechanisms address funding practically.
Instalment Payments
The buy-out price is paid over 12 to 36 monthly instalments. The exiting shareholder effectively extends a seller's loan. The SHA should specify the interest rate (market-linked, typically prime), security for the debt (e.g., suretyship, pledge of shares), and consequences of default.
Shareholder Loan Accounts
Many exiting shareholders also hold a loan account — money the company owes them. That loan is a separate asset from the shares. The buyer pays the share price; the company owes the loan. Paying the share price does not settle the loan, and repaying the loan is not payment for the shares. The SHA should deal with both: whether the company repays the loan over time or the buyer takes it over (an assignment), and at what value.
Buy-and-Sell Life Insurance
Life cover can fund the buy-out on a shareholder's death, so that the remaining shareholders do not have to raise finance at short notice — provided the policy structure matches who is buying. See the dedicated section below for full details.
Bank Financing Right
The SHA may oblige the remaining shareholders to use reasonable efforts to raise bank finance for the buy-out. Any loan depends on the lender's approval, so it cannot be guaranteed. If the company's assets or balance sheet are to be used as security for a shareholder's purchase, that is financial assistance by the company, and the Companies Act approvals described below must be in place first.
Who Is Buying — and Who Is Paying?
- The company buys the shares back. This is a repurchase, not an ordinary sale. It must pass the solvency and liquidity test and the board requirements in section 46 of the Companies Act, and must comply with section 48. Under the current section 48, a buy-back from one particular shareholder generally needs a special resolution of shareholders; the main exception for a private company is an offer made to all shareholders in proportion to their holdings. Repurchased shares are cancelled rather than transferred to the remaining shareholders.
- Another shareholder buys, with the company's help. A company loan, guarantee or security that helps someone buy the company's shares is financial assistance under section 44. The usual route is a shareholders' special resolution passed within the previous two years (or a qualifying employee share scheme), a board that is satisfied about solvency and liquidity and that the terms are fair and reasonable to the company, and compliance with any conditions in the MOI. Section 45 can apply as well where the assistance goes to a director or a related person or company, and it has its own notice requirements. Section 45 does not apply to assistance a company gives to its own subsidiaries, but that exception does not switch off section 44. Identify who receives the assistance, what it is for and who the buyer is before choosing the approval route.
- Suretyships and guarantees. An exiting shareholder who signed surety for the company's bank debt is not released by the SHA. Only the bank can release a surety. The SHA should oblige the remaining shareholders to try to obtain that release and to indemnify the exiting shareholder until it is given.
Life Insurance to Fund the Buy-Out
Two different kinds of policy are often confused. A key-person (key-man) policy is owned by the company and pays the company, to cushion the business against losing an important person. A buy-and-sell policy is usually owned by each shareholder on the lives of the other shareholders, and pays the surviving shareholders so that they can buy the deceased's shares from the estate. The two are not interchangeable: the policy owner, the person who receives the payout, the person who pays the premiums and the person obliged to buy under the SHA must all line up.
If the company owns the policy, the money lands in the company. Getting it to the estate then usually means a company buy-back, which must comply with sections 46 and 48 of the Companies Act and cancels the shares instead of transferring them to the survivors — a different structure with different tax results. Where a trust holds the shares or a policy, check whose interest is being bought and who holds the policy.
Structuring the cover is a specialist exercise. Who owns each policy, whose life it insures and who pays the premiums determines whether the proceeds escape estate duty and capital gains tax — and several of those choices cannot be repaired later. For the full analysis, including the requirements of proviso (iA) to section 3(3)(a) of the Estate Duty Act and the premium traps that most often defeat it, see buy-and-sell policy structure and the premium traps and the tax treatment of a buy-and-sell arrangement.
How It Works
Each shareholder is insured for an amount approximating their share of the company's fair value.
Under a buy-and-sell arrangement, each shareholder normally owns and pays for the policies on the other shareholders' lives. Who pays or bears the premiums matters: if the deceased paid or bore a premium on the policy on their own life, the estate-duty exclusion can fail. Premiums are generally not tax-deductible. A properly structured buy-and-sell policy can be excluded from the deceased's estate for estate duty (Estate Duty Act, s3(3)(a) proviso, where its requirements are met), and the proceeds are typically tax-free where the premiums were not deducted. That exclusion covers the policy proceeds only — the deceased's shares and loan account remain assets in the estate. Check the estate-duty, income-tax and CGT conditions separately, and take advice.
On a shareholder's death, the insurer pays the policy proceeds to the policy owners — under a buy-and-sell arrangement, the surviving shareholders.
The surviving shareholders use the proceeds to purchase the deceased shareholder's shares from the estate at the price set under the SHA.
The deceased's estate receives cash. The surviving shareholders receive the shares. If the cover is adequate, no bank financing is needed.
Benefits
- Liquidity once the claim is paid — no need to raise finance on short notice
- Certainty for the deceased's estate — family knows shares will be converted to cash
- Business continuity — avoids forced asset sales to fund buy-out
- Can cover multiple shareholders cross-insured
Typical Premium Costs
Premiums vary based on age, health, sum insured, and insurer. As a rough guide:
- Shareholder aged 30–40: ±R500–R900/month per R2m insured
- Shareholder aged 40–50: ±R900–R1,500/month per R2m insured
- Shareholder aged 50–60: ±R1,500–R2,500/month per R2m insured
Indicative only. Obtain quotes from a licensed financial advisor.
Keep Policies Updated
Buy-and-sell policies must be reviewed regularly — at minimum annually — to ensure the sum insured tracks the growing value of the business. A policy that insured a shareholder for R1m in 2020 but the business is now worth R8m will leave a significant funding shortfall on death.
Divorce Attachment
Shares in a private company may form part of a shareholder's accrual (in a marriage out of community of property with accrual) or their joint estate (in a marriage in community of property). Divorce does not automatically transfer shares to a spouse: what happens depends on the matrimonial property regime and on the actual court order or settlement. In some cases the shares — or, more often, their value — are brought into account, which creates the risk of a shareholder's ex-spouse acquiring an interest in, or even ownership of, shares in the company.
A well-drafted SHA plans for this, within the limits of matrimonial property law:
No Share Transfer to Ex-Spouse
The SHA and MOI can prohibit the transfer of shares to a spouse or ex-spouse without shareholder consent, so that they do not join the share register. This does not remove the ex-spouse's financial claim.
Value, Not Shares
The aim is that the ex-spouse receives the monetary equivalent of their entitlement — funded, where necessary, by a buy-out of the shareholder's shares — rather than the shares themselves. The SHA cannot bind the divorce court, so the mechanism must work alongside whatever order is made.
Pre-Emptive Right Triggered
The SHA can make a divorce order affecting the shares a trigger event, giving remaining shareholders a right to acquire the affected shares at the SHA valuation price, subject to the terms of the court order.
Winding Up the Company
Winding up — the formal dissolution of the company — is the last resort exit mechanism. It results in the complete termination of the company's existence, the realisation of assets, payment of creditors, and distribution of any remaining surplus to shareholders pro rata. There are two routes under the Companies Act 71 of 2008.
Voluntary Winding Up
Companies Act s79–80
Shareholders resolve voluntarily to wind up the company. This requires a special resolution — normally at least 75% of the voting rights exercised on the resolution, unless the MOI sets a different percentage. The shareholders can also agree in the SHA not to vote for a winding up without unanimous consent, so that a majority cannot impose one on a dissenting minority.
- Pass special resolution (normally at least 75% of votes exercised)
- Appoint a liquidator
- Liquidator realises assets
- Pay creditors in prescribed priority
- Distribute surplus to shareholders pro rata
Compulsory Winding Up
Companies Act s81
A shareholder (or creditor) may apply to the High Court for a winding-up order. For a solvent company, the shareholder grounds are in section 81(1)(d): director deadlock that the shareholders cannot break and that is causing or threatening irreparable injury (or means the business cannot be run to the shareholders' advantage); shareholder deadlock over electing directors across at least two consecutive AGM dates; or that it is otherwise just and equitable to wind the company up. A dispute or a loss of trust is not enough on its own, and a shareholder must generally have held shares for at least six months before applying. This is different from a contractual exit under the SHA, from relief for oppressive or unfairly prejudicial conduct under section 163, and from the winding up of an insolvent company, each of which has its own rules.
Warning
A court-ordered winding up is usually slow and expensive and can destroy value, although a liquidator can sometimes sell the business as a going concern. A court is unlikely to order winding up where there is an adequate alternative remedy — including workable buy-out provisions in a SHA.
Tax on Liquidation
Liquidation is not a single tax calculation. The company can be taxed when it sells its assets. What it then pays out to shareholders may be partly a dividend (subject to dividends tax) and partly a return of contributed tax capital, and each is treated differently. The shareholder's capital gain or loss on the shares is worked out separately when the shares are finally disposed of. For South African resident individuals the maximum effective CGT rate is currently 18% (40% inclusion rate × maximum 45% marginal rate). Obtain tax advice before electing winding up as an exit route.
Restraint of Trade on Exit
An exiting shareholder — particularly one who held a significant role in the business and has detailed knowledge of its clients, suppliers, and operations — represents a competitive threat to the remaining shareholders. A properly drafted restraint of trade clause in the SHA protects the business from immediate competition by the departing shareholder.
Enforceability Under South African Law
South African courts will enforce a restraint of trade in a shareholders agreement provided the restraint is reasonable in scope, time, and geographic area — the test established in Basson v Chilwan 1993 (3) SA 742 (A) and affirmed in subsequent decisions. The court asks: does the party seeking to enforce the restraint have a protectable interest? Is the restraint no wider than necessary to protect that interest?
Unlike employment restraints — where there is an inherent power imbalance between employer and employee — shareholder restraints are negotiated between commercial parties and courts are often more willing to enforce them. Each restraint is still assessed on its own facts: it must protect a legitimate interest and be reasonable in its context. A restraint given on a sale of shares, a restraint on a continuing shareholder and an employment restraint can be assessed differently, and the price paid for the shares is one relevant factor.
The SHA restraint clause should specify the following with precision:
Restrained Area
Define precisely — by suburb, city, province, or nationally — based on the actual geographic footprint of the business. A national restraint is far more easily challenged if the business only operates in two provinces.
Restrained Activities
Limit the restraint to the actual industry or business area of the company — not every possible form of competition. An overly broad restriction may be cut down or not enforced at all — do not rely on a court to repair an over-wide clause.
Duration
Periods of 12 to 36 months from exit are common drafting choices, but no period is automatically enforceable. The period should be no longer than is needed to protect the legitimate interest of the business, such as client connections or confidential information. Longer periods — 5 years or more — need stronger justification, such as a substantial price paid for the shares and a significant protectable interest.
Exit Checklist
Use the following checklist to verify that your shareholders agreement comprehensively addresses exit. Every item below should be expressly dealt with in the SHA — silence on any one of them is a gap that may be exploited in a dispute.
8 Items Every SHA Exit Clause Must Address
Trigger Events
Exhaustive list of events that trigger a compulsory share offer: death, incapacity, insolvency, dismissal, resignation, divorce attachment, deadlock.
Good Leaver / Bad Leaver Definition
Clear, unambiguous definitions of what constitutes a good leaver, bad leaver, and any intermediate categories — with the corresponding price for each.
Valuation Method
Agreed formula (EBITDA multiple, NAV, or other) for determining share value. Who appoints the valuer, acting as expert or arbitrator, and the timeline.
Payment Timeline and Security
Whether the buy-out is paid in a lump sum or instalments, the instalment period and interest rate, and what security the exiting shareholder holds for deferred payment. Also how the exiting shareholder's loan account is dealt with and how they will be released from suretyships (which needs the creditor's consent).
Buy-Out Life Insurance
Who must take out and pay for life cover on each shareholder's life, a policy structure that matches the agreed buyer, the sum insured review mechanism, and how proceeds are applied on death.
Pre-Emptive Rights
The complete pre-emptive rights mechanism — offer notice, acceptance period, pro rata allocation among accepting shareholders, and third-party sale restrictions.
Drag-Along / Tag-Along
Conditions under which the majority can drag the minority, the minimum price guarantee, same-terms protection, and the minority's tag-along right on any third-party sale.
Restraint Post-Exit
Geographic area, restrained activities, and duration of the non-compete and non-solicitation obligations binding on the exiting shareholder after transfer of their shares.