Exit provisions are 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 exit defaults to the statutory processes under the Companies Act 71 of 2008 — which may not reflect the parties' commercial intentions, gives no pricing certainty, and can be significantly 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 30 to 60 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 deserves full value; a shareholder who exits in breach of their obligations or on hostile terms does not.
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
- Material breach of the SHA not remedied
Price Received
A discounted price — commonly 50% of fair value — or par value (the nominal value of the shares), whichever is lower.
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
South African courts will enforce good leaver / bad leaver clauses provided the penalty is proportionate and not unconscionable. A clause that purports to forfeit all of a shareholder's value in circumstances that are only marginally bad may be susceptible to challenge as a penalty under the Conventional Penalties Act 15 of 1962. Care must be taken in drafting to ensure the discount is 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. The following mechanisms address this 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.
Loan Account Conversion
Where the exiting shareholder holds a loan account in the company (a common structure in South African private companies), the buy-out may be structured as the repayment of the loan account over time rather than an immediate lump-sum payment for the shares.
Key-Man Life Insurance
Life insurance proceeds fund the buy-out on a shareholder's death, providing immediate liquidity without requiring remaining shareholders to raise finance. See the dedicated section below for full details.
Bank Financing Right
The SHA may grant the company or the remaining shareholders a right — and an obligation — to secure bank financing for the buy-out amount, using the company's balance sheet or assets as collateral where permitted. This ensures the buy-out proceeds even if shareholders lack personal liquidity.
Key-Man Life Insurance
Key-man (or key-person) life insurance is a life insurance policy where the company or remaining shareholders are the policyholders and beneficiaries, and the life insured is each shareholder. On the death of a shareholder, the insurance proceeds are paid to the company or the surviving shareholders and are used specifically to fund the buy-out of the deceased shareholder's estate.
How It Works
Each shareholder is insured for an amount approximating their share of the company's fair value.
The company or remaining shareholders pay the monthly premiums. Premiums are generally not tax-deductible.
On a shareholder's death, the insurer pays the policy proceeds to the company or surviving shareholders.
The proceeds are used to purchase the deceased shareholder's shares from their estate at the pre-agreed price.
The deceased's estate receives cash. The surviving shareholders receive the shares. No bank financing is required.
Benefits
- Immediate liquidity — 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
Key-man 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). On divorce, the shares — or their value — may be subject to a forfeiture order or attachment. This 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 addresses this directly:
No Share Transfer to Ex-Spouse
The spouse or ex-spouse cannot become a registered shareholder. The SHA prohibits transfer of shares to any spouse without unanimous shareholder consent.
Value, Not Shares
The ex-spouse receives the monetary equivalent of their entitlement — paid from the buy-out of the shareholder's shares — rather than the shares themselves.
Pre-Emptive Right Triggered
A divorce attachment or order constitutes a trigger event under the SHA, giving remaining shareholders a right of first refusal to acquire the affected shares at the SHA valuation price.
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. Requires a special resolution: 75% of voting rights in favour. The SHA may — and often should — increase this threshold to require unanimous shareholder consent, preventing a majority from imposing a winding up on a dissenting minority.
- Pass special resolution (75% or as required by SHA)
- Appoint a liquidator
- Liquidator realises assets
- Pay creditors in prescribed priority
- Distribute surplus to shareholders pro rata
Compulsory Winding Up
Companies Act s81
Any shareholder (or creditor) may apply to the High Court for a winding up order. Most relevant ground for shareholders: just and equitable — the court has wide discretion to wind up a company where it is just and equitable to do so, which is frequently invoked in deadlock situations or where there has been a breakdown of the mutual trust and confidence between shareholders.
Warning
A court-ordered winding up is slow, expensive, and destroys value. Courts will generally not order winding up where there is an adequate alternative remedy — including buy-out provisions in a SHA.
CGT Implications on Liquidation
On liquidation, a shareholder is deemed to have disposed of their shares at market value for capital gains tax purposes. If the company has appreciated significantly in value, the CGT liability on liquidation may be substantial. South African resident individuals are taxed at an effective CGT rate of up to 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 more willing to enforce them. The greater the consideration paid for the shares, the more readily courts will hold a departing shareholder to their restraint.
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. Overly broad activity restrictions are more susceptible to partial enforcement or invalidation.
Duration
12 to 36 months from exit is typically enforceable in South African courts for shareholder restraints. Longer periods — 5 years or more — are generally only upheld where the consideration paid was substantial and the protectable interest is significant.
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.
Key-Man Life Insurance
Obligation on the company or shareholders to maintain life insurance on each shareholder's life, 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.