A shareholders agreement is only as good as its clauses. An agreement that omits critical provisions — or that includes vague, aspirational language without operational detail — will fail precisely when it is needed most: during a dispute, a funding crisis, or an unwanted exit. The Companies Act 71 of 2008 provides the legal framework within which a South African company operates, but it deliberately leaves enormous latitude for shareholders to arrange their own affairs through contract.
This guide examines each of the core provisions that a well-drafted shareholders agreement should address, explains the legal context for each, and identifies the practical pitfalls that arise when these clauses are missing or poorly drafted. Whether you are founding a startup, bringing in a new investor, or restructuring an existing shareholder relationship, this is your clause-by-clause reference for what must be in the document.
2. Voting Rights and Reserved Matters
Not all decisions should be made by the same majority. A well-drafted shareholders agreement distinguishes between ordinary decisions (simple majority of shares voting), special majority decisions (typically 75%), and reserved matters — decisions so fundamental that they require unanimous shareholder consent or the consent of specific classes of shareholders regardless of their overall shareholding.
Reserved Matters: Decisions Requiring Unanimous Consent
The following matters are commonly included as reserved matters requiring the written consent of all shareholders, irrespective of their percentage shareholding:
- Amending the shareholders agreement itself or the MOI
- Issuing new shares or granting options over unissued shares
- Taking on debt above an agreed threshold (e.g., more than 20% of net asset value)
- Entering into related party transactions (including transactions with shareholders, directors, or their associates)
- Disposing of substantially all of the company's business or assets
- Changing the nature of the company's business
- Appointing or removing the CEO or managing director
- Approving the annual budget or any material deviation from it
- Initiating or settling litigation above an agreed threshold
- Declaring dividends outside of the agreed dividend policy
- Winding up or dissolving the company voluntarily
Board composition is closely linked to voting rights. The shareholders agreement should specify how many directors each shareholder (or class of shareholder) is entitled to appoint, and what happens in the event of a deadlock at board level. Where directors are split evenly and no side can pass a resolution, the shareholders agreement needs a mechanism to break the deadlock — whether a casting vote, an escalation procedure, or a deemed trigger event.
Minority Protection
Minority shareholders need contractual protection that goes beyond the statutory protections in sections 163 and 164 of the Companies Act (oppression remedy and appraisal rights). Reserved matters that require minority consent are the primary tool — without them, a majority shareholder can dilute a minority's interest, redirect business opportunities, or remove minority-appointed directors with impunity. Every minority shareholder should insist on a meaningful reserved matters schedule as a condition of investment.
3. Dividend Policy
One of the most common sources of shareholder conflict is a disagreement about whether — and how much — to distribute profits. One shareholder may need regular income distributions; another may prefer to reinvest profits for growth. Without a clear dividend policy in the shareholders agreement, the majority can simply vote against any distribution and leave minority shareholders with no return on their investment for years.
Discretionary Dividend Policy
Directors retain full discretion to declare (or not declare) dividends. Most appropriate where:
- •The company is in a high-growth phase and needs capital reinvestment
- •All shareholders are aligned on reinvestment strategy
- •Shareholders are primarily interested in capital appreciation, not income
Mandatory Dividend Policy
The SHA requires a minimum distribution of a specified percentage of after-tax profits each year. Most appropriate where:
- •Minority shareholders are investors who need an income return
- •BEE shareholders have funded their equity through loans and need distributions to service those loans
- •The company generates stable, predictable profits
Regardless of the policy, the shareholders agreement must acknowledge the constraints of section 4 of the Companies Act — the solvency and liquidity test. A dividend may only be declared if the company will satisfy the solvency and liquidity test immediately after the distribution. This is a mandatory statutory requirement and cannot be contracted out of; the SHA should simply cross-reference the obligation rather than attempting to supersede it.
Where preference shares are in issue, the SHA must specify the dividend waterfall — typically, preference dividends are paid first, with ordinary shareholders receiving any residual after the preference entitlement is satisfied. The SHA should also address whether unpaid preference dividends accumulate (cumulative preference shares) or are lost if not paid in any particular year (non-cumulative).
4. Management and Operations
A shareholders agreement that deals only with ownership and not with how the company is actually run will fail the moment day-to-day business decisions become contentious. The operational provisions of the SHA define who has authority to make which decisions, what thresholds trigger shareholder involvement, and how the company's finances are controlled.
CEO / MD Appointment
The SHA should specify whether the CEO or managing director is appointed by the board or requires shareholder approval, and what happens if the CEO resigns or is dismissed. In many closely-held companies, a shareholder-director fills the CEO role — the SHA should address what happens to their operational authority if they sell their shares.
Reserved Management Decisions
Below the level of formal reserved matters (which require shareholder approval), the SHA should also identify management decisions that require board approval rather than being delegable to executives — for example, capital expenditure above a stated threshold, entering leases for terms exceeding a specified duration, or hiring senior employees above a salary threshold.
Signing Authority
The SHA should set out the company's signing authority policy: which transactions can be signed by any single director, which require two directors, and which require both shareholder and board approval. This is particularly important for binding the company in contracts, guarantees, and security arrangements.
Bank Account Signatories
Specify who is authorised to operate each of the company's bank accounts, the maximum transaction amounts that can be processed by a single signatory, and whether dual authorisation is required above a threshold. This is a key internal control and a common source of fraud if not properly structured.
Annual Budget and Business Plan
The SHA should require the preparation of an annual budget and business plan, specify who prepares it, and require shareholder or board approval before the start of each financial year. Material deviations from the approved budget should require the same level of approval as the original budget.
5. Funding Obligations
How will the company be funded when it needs capital beyond its operating cashflows? This is one of the most consequential questions a shareholders agreement must answer — and one of the most common areas of dispute when it is left unaddressed. The SHA must clearly set out whether shareholders are obliged to contribute further capital when called upon, on what terms, and what happens when a shareholder cannot or will not fund.
Shareholder Loan Provisions
Many South African closely-held companies are funded through shareholder loans rather than equity. The SHA should specify the terms of any shareholder loans — the interest rate (or whether loans are interest-free), the repayment priority relative to third-party creditors, and whether loans are subordinated in favour of external financiers. The SHA should also address what happens to shareholder loans when a shareholder exits.
Section 45 — Financial Assistance
Section 45 of the Companies Act prohibits a company from providing financial assistance to a related or inter-related person (including a shareholder) to acquire its own shares or those of a related company, unless the board passes a special resolution and the solvency and liquidity test is satisfied. Any funding arrangements that could constitute financial assistance under s45 must be carefully structured to comply with these requirements. The SHA should cross-reference s45 compliance obligations explicitly.
Equity Call Provisions
If shareholders agree to contribute further equity when required, the SHA should address:
- •What triggers an equity call (e.g., board resolution passed by specified majority)
- •Pro-rata obligation based on current shareholding
- •Notice period and payment deadline
- •Consequences of failing to contribute (dilution, drag, loan conversion)
Conversion of Loans to Equity
Many SHAs include provisions allowing shareholder loans to be converted to equity. Key drafting points include:
- •Who can elect conversion (lender, borrower, or mutual agreement)
- •Conversion price (agreed valuation methodology)
- •Anti-dilution protection for non-converting shareholders
- •Timing: before or after an exit event
The SHA should address shareholder guarantee obligations — many banks require personal suretyships from shareholders as a condition of lending to the company. The SHA should specify which shareholders are required to provide suretyships, whether non-suretyship shareholders are obliged to indemnify suretyship shareholders proportionately, and what happens to suretyship obligations when a shareholder exits.
6. Intellectual Property
In technology, media, and professional services businesses, intellectual property is often the company's most valuable asset — yet it is routinely overlooked in shareholders agreements. If a shareholder-founder exits taking their IP with them, the remaining shareholders and the company may be left with nothing. The SHA must address IP ownership, assignment, and the consequences of a shareholder departure.
Core IP Provisions
IP Assignment to the Company
The SHA should require each shareholder who contributes intellectual property to the company to formally assign that IP to the company — either on execution of the SHA or on a continuing basis as new IP is developed in the course of their work for the company. The assignment should cover patents, trademarks, copyrights, trade secrets, software, and domain names.
Confidentiality Obligations
The SHA should impose ongoing confidentiality obligations on shareholders with respect to the company's IP, trade secrets, and technical know-how. These obligations should survive the shareholder's exit from the company for a defined period — typically 3 to 5 years.
IP on Exit
Critically, the SHA must address what happens to any IP created by a departing shareholder during their tenure. If the SHA does not contain a clear assignment obligation, a departing founder may legitimately claim ownership of IP they developed, even where that development occurred during their time as a shareholder and/or director of the company.
Background IP
Where shareholders bring pre-existing IP into the company (background IP), the SHA should distinguish between IP that is formally assigned to the company and IP that is merely licensed to the company. Licensed background IP may be withdrawn by a departing shareholder; assigned IP may not. The distinction must be explicit.
7. Non-Compete and Restraint of Trade
A shareholder who exits a company and immediately establishes a competing business — taking clients, employees, and confidential information — can destroy the value of the remaining shareholders' investment. Restraint of trade clauses in a shareholders agreement are designed to prevent this, but they must be carefully drafted to be enforceable under South African law.
The Basson v Chilwan Reasonableness Test
South African courts apply the test established in Basson v Chilwan 1993 (3) SA 742 (A) to determine whether a restraint of trade is enforceable. The test considers:
1. Is there a protectable interest?
The company must have a legitimate interest worth protecting — such as trade connections, confidential information, or goodwill built up through the restrained party's efforts. A restraint that protects nothing more than competition per se will not be enforced.
2. Is that interest threatened?
The court will ask whether the restrained party, if not restrained, would in fact threaten the protectable interest — by virtue of the relationships and knowledge they built up during their association with the company.
3. Does the restraint harm the public interest?
Courts are reluctant to enforce restraints that prevent a person from earning a living entirely. The restraint must be proportionate to the interest being protected.
4. Is the restraint proportionate?
The geographic scope, duration, and industry scope of the restraint must be proportionate to the protectable interest. Overly broad restraints — covering the whole of South Africa for five years in an unrelated industry — will typically not be enforced.
Geographic Scope
Limit to the areas where the company actually operates and where the restrained party had client contact. A nationwide restraint for a local business is unlikely to be fully enforced.
Time Limit
Typically 12 to 24 months post-exit for a shareholder in a closely held company. Longer periods may be justified for senior founders or where significant confidential information is at stake.
Industry Scope
Define the prohibited activities with precision — reference specific services, products, or customer categories. A vague "competing business" definition invites disputes and partial enforcement.
The Blue-Pencil Doctrine
South African courts can apply the blue-pencil doctrine — severing the unenforceable parts of a restraint clause and enforcing the remainder, provided the remaining portions make grammatical and legal sense. However, courts are increasingly reluctant to rewrite poorly drafted restraints for the parties. Draft each element of your restraint clause — geography, time, and industry — as a self-contained obligation so that any one of them can stand independently if another is struck down.
8. BEE Compliance Obligations
Where a company's shareholding includes a Black Economic Empowerment component — whether to comply with sector codes, government procurement requirements, or licensing conditions — the shareholders agreement must address the specific BEE obligations of each shareholder and the consequences of non-compliance. BEE provisions are among the most technically complex elements of any South African shareholders agreement.
Key BEE Provisions
Lock-in Periods
BEE shareholders are typically required to hold their shares for a minimum period — often 3 to 5 years, or until specified conditions are met (such as the repayment of funded equity loans). The SHA must make clear that any attempt to transfer shares during the lock-in period is void and constitutes a material breach.
Vesting Schedules
Where BEE equity is awarded in tranches over time (performance vesting), the SHA must specify the vesting conditions, the measurement criteria, and what happens to unvested shares if a BEE shareholder exits before full vesting. Cliff vesting (all-or-nothing at a defined date) is simpler to administer but may not align with performance objectives.
Funded Equity Structures
BEE shareholders who cannot fund their equity subscription upfront typically receive "funded equity" — the company or a third-party lender provides the funding, and the BEE shareholder repays from dividends over time. The SHA must address the loan terms, how dividends are applied to repayment, and what happens if dividends are insufficient to service the loan.
Maintenance of BEE Status
The SHA must impose ongoing obligations on BEE shareholders to maintain their BEE credentials — including their citizenship, their compliance with the Natural Persons Score under the relevant sector code, and their ownership of the shares in their own name (not through intermediary structures that dilute the BEE recognition level).
Consequences of Loss of BEE Status
The SHA must specify what happens if a BEE shareholder loses their qualifying status — whether through change of citizenship, death, disability, or structural changes to their holding vehicle. Typical remedies include a forced sale at an agreed price, the option for remaining shareholders to acquire the shares, or a right for the company to issue further shares to restore the BEE percentage.
9. Confidentiality
A confidentiality clause in a shareholders agreement serves a different purpose from the confidentiality obligations in a non-disclosure agreement — it is specifically designed to protect the company's internal information from being disclosed by shareholders to third parties, including competitors. The clause must be precisely drafted to be effective.
What to Include in the Definition
- •Financial statements, management accounts, and projections
- •Customer and supplier lists, pricing, and contractual terms
- •Business plans, strategies, and marketing plans
- •Personnel information, salaries, and HR records
- •Technical know-how, processes, formulas, and software source code
- •The terms of the shareholders agreement itself
Standard Carve-outs
- •Information that is or becomes publicly available through no fault of the recipient
- •Information that the recipient can demonstrate was known to them before disclosure
- •Information received from a third party without any obligation of confidentiality
- •Disclosure required by law, court order, or regulatory authority
- •Disclosure to professional advisers (attorneys, accountants) bound by professional confidentiality
The duration of confidentiality obligations should be explicitly stated. During the shareholder's tenure, confidentiality obligations are unlimited in time. Post-exit, a defined period — typically 3 to 5 years — is appropriate for most categories of information. Some categories (trade secrets and unpublished technical know-how) may warrant indefinite protection.
11. Deadlock Provisions
A deadlock arises when shareholders cannot reach agreement on a decision that requires unanimous or special majority consent, and the company is unable to act. Without a deadlock resolution mechanism, a company can be paralysed indefinitely — unable to proceed with important decisions, exposed to the risk of one shareholder seeking a winding-up order under the Companies Act.
Deadlock provisions typically operate in stages: an initial escalation to senior management or the shareholders themselves, followed by a mediation or cooling-off period, and ultimately a forced buy-sell mechanism (such as a shotgun clause or Russian roulette clause) if the deadlock persists. The appropriate mechanism depends on the equality of the shareholders' bargaining positions and the nature of the business.
Read our detailed guide to deadlock provisions12. Dispute Resolution
Beyond deadlock resolution, a shareholders agreement needs a general dispute resolution clause covering all disputes arising out of or in connection with the agreement. Litigation in the South African High Court is public, expensive, and slow — for commercial disputes between shareholders, a carefully structured dispute resolution framework can avoid years of costly and disruptive litigation.
Best practice is a tiered dispute resolution clause: good-faith negotiation between senior representatives, followed by formal mediation, and finally binding arbitration. Arbitration under the AFSA (Arbitration Foundation of Southern Africa) or LCIA rules offers confidentiality, speed, and the ability to appoint a subject-matter expert as arbitrator. The clause should specify the seat of arbitration, the number of arbitrators, the language of proceedings, and whether the arbitral award may be appealed.
Read our detailed guide to shareholder dispute resolution13. Exit Provisions
Every shareholder will eventually exit — through a planned sale, retirement, death, disability, insolvency, or termination of employment. The shareholders agreement must anticipate each of these scenarios and specify both the mechanism for the transfer of shares and the price at which shares will change hands. A shareholders agreement that is silent on exit is a litigation waiting to happen.
Exit provisions must address leaver provisions (distinguishing between good leavers and bad leavers, each attracting different exit prices), the valuation methodology for shares on exit, how disputes about valuation are resolved, and the timeline for completing a buy-out. Drag-along rights (allowing majority shareholders to compel minority shareholders to join a sale) and tag-along rights (protecting minority shareholders' right to participate in a sale by the majority) are closely related to exit provisions and must be included.
Read our detailed guide to exit provisions14. Governing Law and Jurisdiction
For a South African company with South African shareholders, the governing law clause is typically straightforward — the laws of the Republic of South Africa govern the agreement. However, even in a domestic context, the clause should be explicitly stated. Where shareholders are based in different countries, or where the company has significant international operations, the choice of governing law becomes more complex and requires careful legal advice.
Jurisdiction and Arbitration Seat
For Litigation
Where the SHA provides for disputes to be resolved by litigation (rather than arbitration), the parties should agree in advance on the jurisdiction of the relevant High Court — typically the Western Cape Division in Cape Town for Western Cape-based businesses, or the Gauteng Local Division (Johannesburg) or Gauteng Division (Pretoria) for Gauteng-based entities. The clause should expressly state that each party submits to the non-exclusive jurisdiction of that court.
For Arbitration
The arbitration clause should specify: (1) the arbitration rules to apply (AFSA, LCIA, or ad hoc under the Arbitration Act 42 of 1965 / International Arbitration Act 15 of 2017); (2) the seat of arbitration (Johannesburg or Cape Town); (3) the number of arbitrators (sole arbitrator for smaller disputes, tribunal of three for significant claims); and (4) that the award shall be final and binding, with any appeal excluded unless the parties expressly agree otherwise.
15. Essential Drafting Tips
Even a comprehensive shareholders agreement can fail if it is poorly drafted or integrated. Before finalising any shareholders agreement, apply these five essential principles:
Align the SHA with the MOI
The shareholders agreement operates alongside the company's Memorandum of Incorporation — it does not replace it. Conflicts between the SHA and the MOI are resolved in favour of the MOI in most circumstances under the Companies Act. Before finalising the SHA, review the MOI carefully and either amend it to align with the SHA or ensure that the SHA does not conflict with its provisions. Key provisions — such as share transfer restrictions and pre-emptive rights — should ideally appear in both documents.
Consider Future Scenarios
The best time to negotiate dispute resolution, exit mechanisms, and deadlock provisions is before any dispute arises — when all parties are aligned and motivated to agree. Draft the SHA with an eye to the scenarios that could arise in 3, 5, or 10 years: What happens if the founding team breaks up? What if one shareholder wants to sell and the others don't? What if the company needs significant additional capital? Each of these scenarios should have a clear contractual answer.
Include Sunset Provisions
Some SHA clauses are designed to apply only for a limited period — for example, lock-in provisions that apply only until BEE equity loans are repaid, or anti-dilution rights that fall away once a company achieves a specified valuation milestone. Include sunset provisions — automatic expiry dates or trigger events — for clauses that should not apply indefinitely. An SHA that is never reviewed can become increasingly irrelevant or even counterproductive as the company grows.
Attach a Signed Copy to CIPC Records
A shareholders agreement is a private contract — it is not filed with the Companies and Intellectual Property Commission (CIPC) and is not publicly accessible. However, it is good practice to ensure that the company's own records include a complete, signed copy of the current SHA (and any amendments). This prevents disputes about which version is operative and provides a clear audit trail for future shareholders, investors, and lenders conducting due diligence.
Review on Major Events
A shareholders agreement should never be treated as a set-and-forget document. It should be reviewed and updated whenever a significant event occurs: when a new shareholder joins, when an existing shareholder exits, when the company changes its business significantly, when external financing is obtained or restructured, or when relevant legislation changes materially. Schedule an annual review of the SHA as part of the company's corporate governance calendar.
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