Shareholders Agreement FAQ: 20 Questions Answered

A shareholders agreement (SHA) is a private contract between the shareholders of a company that governs their rights, obligations, and relationship as shareholders. It supplements the company's Memorandum of Incorporation (MOI) and, unlike the MOI, is not ordinarily filed with CIPC. It is not required by law but is strongly recommended for any company with two or more shareholders.

Learn more in our comprehensive guide to shareholders agreements in South Africa.

No. The Companies Act 71 of 2008 does not require companies to have a shareholders agreement. Shareholder relationships are governed by the Act and the MOI by default. However, a SHA is strongly recommended because the Act and MOI often do not adequately address commercial arrangements between shareholders.

The MOI (Memorandum of Incorporation) is a public document registered with the CIPC that governs the company's internal governance structure. It binds the company, its shareholders and its directors in the way the Companies Act provides. The SHA is a private contract — it binds only the parties to it, is not ordinarily filed with CIPC, and typically covers commercial matters the shareholders prefer to keep out of a public document. Confidentiality should be written into the SHA itself, and it still gives way where the law requires disclosure. A new shareholder does not become a party to the SHA just by acquiring shares, which is why incoming shareholders usually sign a deed of adherence. The SHA cannot override the Companies Act or the MOI.

Read our full article on what to include in a shareholders agreement.

No. Section 15(7) of the Companies Act provides that any provision of a shareholders agreement that is inconsistent with the Companies Act or the company's MOI is void to that extent. The SHA must be drafted carefully to avoid inconsistency with the Act.

As a rough guide, attorney fees for a shareholders agreement in South Africa typically range from about R8,000–R20,000 for a straightforward two-shareholder company, and R30,000–R60,000 or more for complex agreements with BEE structuring, multiple share classes, or international shareholders. Firms that are registered VAT vendors add 15% VAT to their fees. MJ Kotze Inc's own fixed fee for a standard shareholders agreement is R12,150. MJ Kotze Inc is not a VAT vendor, so the fee is the amount quoted. Complex multi-party or BEE structures are quoted separately.

See our detailed guide on the shareholders agreement drafting process.

Drafting itself can be quick: for a standard SHA, the first draft follows shortly after we have complete instructions. Getting from first draft to a signed agreement takes longer, because the shareholders still need to review, negotiate and sign. For a simple SHA, allow around 2–3 weeks from instruction to signing. A complex multi-party SHA with BEE elements may take 4–8 weeks or more.

Online templates are not recommended. A South African SHA must be consistent with the company's specific MOI and the Companies Act. Templates are rarely tailored for SA law, BEE requirements, or the specific commercial arrangement of the shareholders.

Read our guide on what a shareholders agreement should cover.

Ideally at incorporation, before any party invests capital or contributes sweat equity. In practice, many companies incorporate without an SHA and add one when the need arises — e.g., when adding a new shareholder or when a dispute is already brewing. A signed written agreement is strongly recommended because it records everyone's consent and reduces arguments about the terms. Whether an unsigned draft is binding depends on what the parties agreed and whether they intended signature to be a condition of being bound — so if nobody should be bound until everyone has signed, say so in the document.

Usually not freely. The MOI of a private company must restrict the transferability of its shares (section 8(2)(b) of the Companies Act), so the first step is always to read the MOI — even where there is no SHA. The SHA typically adds more detailed restrictions, such as pre-emptive rights and lock-in provisions requiring consent or a first offer to the other shareholders before any external transfer. A transfer made in breach of the SHA is not automatically void; the consequences depend on the wording of the SHA and the MOI and on the applicable law.

See our full guide on share transfer restrictions in a shareholders agreement.

A pre-emptive right gives existing shareholders priority to buy a selling shareholder's shares before an outsider can. It usually takes one of two forms. Under a right of first offer, the seller must give notice and offer the shares to the existing shareholders at a proposed price for a specified period before approaching third parties. Under a right of first refusal, the seller first obtains a third-party offer and the existing shareholders may match it. These rights on a transfer are contractual. They are different from the default pre-emptive right in section 39 of the Companies Act, which applies when a private company issues certain new shares and which the MOI may limit or exclude.

A drag-along clause entitles a majority shareholder to compel the remaining shareholders to sell their shares on the same terms when the majority accepts a third-party offer for 100% of the company. This enables a clean sale without a minority blocking the transaction. It is a contractual right, not an automatic statutory one: it exists only if the SHA or MOI provides for it, and the qualifying majority is whatever the parties agree (75% is a common choice). A good clause also deals with equal treatment across share classes, non-cash consideration, side arrangements and the warranties the minority must give.

Learn more in our guide to drag-along and tag-along provisions.

A tag-along clause gives minority shareholders the right to "tag along" on the same terms when a majority shareholder sells to a third party. This protects minority shareholders from being left in the company under a new majority shareholder they did not choose. Like a drag-along, it is a contractual right. The buyer is not automatically bound by the SHA, so the clause should oblige the selling majority to procure that the buyer makes the same offer to the minority — or not to sell.

A deadlock occurs when shareholders are unable to reach agreement on a matter that requires a specific majority or unanimous consent. This is most common in 50/50 companies where neither shareholder can outvote the other. A disagreement on one matter does not necessarily paralyse the whole business, but a serious deadlock with no agreed way out can do real damage. Without an SHA, the Companies Act and the MOI still apply and the parties can still negotiate or agree to mediate, but there is no automatic right to force the other shareholder to buy you out.

Read our guide on deadlock resolution mechanisms in shareholders agreements.

A Texas shootout (or sealed-bid auction) is a deadlock resolution mechanism where both shareholders submit sealed bids for the company's shares, and the highest bidder is obliged to buy the other out at its own bid price. Neither party can see the other's bid, which encourages realistic pricing — but it does not guarantee fair value. A bidder can still bid below what it thinks the business is worth, and a shareholder with better information or easier access to cash has an advantage. It is often confused with a Russian roulette clause, which works differently: there, one shareholder names a single price and the other shareholder elects either to buy the offeror's shares or to sell its own shares at that price. The names are not legal terms and are used loosely in practice, so the clause itself must spell out the trigger, the exact mechanic, proof of funding, payment terms and what happens if the buyer defaults.

Possibly, but deadlock alone is not enough. Under section 81(1)(d) of the Companies Act, a court may wind up a solvent company where the directors are deadlocked and the shareholders cannot break the deadlock, and the deadlock is causing or threatening irreparable harm to the company or means the business can no longer be run to the shareholders' advantage. There is a separate ground where the shareholders are deadlocked in electing directors, and a general ground where winding-up is just and equitable. A shareholder who applies must also meet the standing requirement in section 81(2), which generally means having held the shares for at least six months. South African courts have accepted that shareholder deadlock can make a winding-up just and equitable (Moosa NO v Mavjee Bhawan (Pty) Ltd 1967 (3) SA 131 (T)). Winding-up is a last resort that can destroy value, and it is not the only option — negotiation, agreed mediation or arbitration, a contractual exit mechanism or relief under section 163 may be more suitable.

Under the Companies Act: inspection rights (s26), voting rights (s65), appraisal rights on specified transactions and materially adverse changes to class rights (s164), and the oppression remedy (s163). On voting, an ordinary resolution normally needs more than 50% of the votes exercised, and the MOI can raise but not lower that. A special resolution normally needs at least 75% of the votes exercised, unless the MOI sets a different percentage. A shareholder who can exercise more than 25% of the votes can therefore usually block a special resolution by voting against it — but this depends on the MOI, the share classes and the votes actually cast. Under the SHA: veto rights on reserved matters, board representation, anti-dilution protection, tag-along rights, and information rights.

See our guide to minority shareholder protections in a shareholders agreement.

Section 163 of the Companies Act allows any shareholder (majority or minority) to apply to court for relief if the majority's conduct is unfairly prejudicial, unjust, or inequitable to that shareholder. The court has wide discretion, including ordering a compulsory buy-out at fair value. The section is frequently used in shareholder disputes.

Not simply by holding a majority. Issuing shares is a company decision, usually taken by the board within the limits of the MOI and sections 36 to 41 of the Companies Act. Under section 39, shareholders of a private company have a default pre-emptive right to be offered certain new shares in proportion to their holdings, but the MOI may limit or exclude that right — so check the MOI first. A majority that controls the board can still drive a dilutive issue, so the SHA should protect the minority by: (1) requiring minority consent before new shares are issued, (2) giving the minority contractual pro-rata rights on new issuances, (3) prohibiting share issues that would alter ownership ratios without consent.

A good leaver exits on agreed good terms (death, incapacity, retirement after an agreed period) and usually receives full fair value for their shares. A bad leaver exits on bad terms (for example, a serious breach of the SHA or competing in breach of a restraint) and receives a lower price under a formula set out in the agreement. The aim is to encourage shareholders to fulfil their commitments. No standard discount is guaranteed to be enforceable. A breach-linked discount can be treated as a penalty under the Conventional Penalties Act 15 of 1962, and a court may reduce a penalty that is out of proportion to the harm actually suffered. Insolvency, employment and company-law rules can also apply. Define the leaver events precisely, keep any discount proportionate, and spell out the actual price formula — do not refer to "par value", because ordinary shares issued under the current Companies Act have no par value.

Read more about good leaver and bad leaver provisions.

The deceased's shares form part of their estate and are administered by the executor. The executor must deal with the shares according to the will (or the rules of intestate succession), the MOI and the Companies Act. Death does not automatically oblige the surviving shareholders to buy the shares, and without an SHA they may have no right to do so — the deceased's heirs (who may have no business relationship with the company) may become shareholders. An SHA can set out a procedure on death: who may or must buy the shares, at what price, by when and with what funding. The funding is often buy-and-sell life cover held by the co-shareholders on each other's lives. That is different from a key-person policy, which pays the company, so the policy structure must match the agreed buyer. The procedure always operates subject to succession law and the executor's duties.