Shareholder agreements are easiest to negotiate while everyone still trusts one another. At that stage, founders can discuss money, control and departure without every question sounding like an accusation. Once a dispute begins, the same conversation becomes considerably harder.
The five clauses shareholder disputes frequently turn on address decisions, working relationships, funding, transfers and exit. They determine who can act, who must contribute, how shares are valued and what happens when the shareholders can no longer work together.
A useful agreement does more than record good intentions. It gives the business a practical process to follow when those intentions are tested.
1. Decision making and reserved matters
A company needs enough freedom to operate without asking every shareholder to approve every purchase. It also needs safeguards against significant decisions being taken without the agreed involvement of its owners.
Reserved matters identify decisions requiring a particular approval. Depending on the business, these might include:
- Borrowing above an agreed amount.
- Issuing shares or bringing in an investor.
- Selling important assets.
- Entering a substantially different business.
- Approving transactions involving a shareholder or related business.
- Changing the agreed annual budget materially.
The list should reflect the company’s actual risks. A property company and a software business are unlikely to need identical restrictions.
Define the approval process precisely
“Major decisions require agreement” leaves several unanswered questions. What is major? Whose agreement is required? Does silence count as approval? What happens when someone refuses to attend the meeting?
The agreement should specify thresholds, notice requirements, the information needed before a decision and how approval is recorded. It should also distinguish shareholder approval from board decisions and delegated management authority.
Consider two founders who agree that borrowing above R500,000 needs their joint approval. They should also consider whether several smaller loans count together. Otherwise, the protection may be undermined by a series of transactions that individually fall below the limit.
Use veto rights carefully
A minority shareholder may need protection against decisions that fundamentally change the investment. Requiring unanimous approval for routine operations, however, can make the company difficult to manage.
Before agreeing to a veto, ask what happens if it is exercised repeatedly. A protection that appears reassuring during negotiations may later prevent the business from renewing essential contracts or obtaining finance.
The aim is a workable balance between oversight and the ability to operate.
2. Roles, performance and remuneration
Founders often use “partner”, “director”, “employee” and “shareholder” as though they describe the same position. Each role involves different rights and responsibilities.
Someone may own shares without working in the business. Another person may manage operations while holding only a small shareholding. A founder may leave employment but remain an owner unless an enforceable arrangement provides otherwise.
The shareholder agreement should make those distinctions clear.
Record what working shareholders are expected to contribute
Where ownership is linked to active involvement, discuss that involvement expressly. Relevant questions include:
- What role will each founder perform?
- How much time must each person commit?
- Who assesses performance?
- Can a founder work for another business?
- What happens during extended illness or incapacity?
- What happens to the shares when the working relationship ends?
Employment contracts, service agreements and the shareholder agreement should support the same arrangement. Ending employment does not automatically settle every question about ownership.
For example, a founder who contributed capital and a founder who contributed expertise may have different expectations about continued involvement. Those expectations should be discussed before one person concludes that the other is “not pulling their weight”.
Separate remuneration from ownership
Salary pays for work. Dividends are distributions associated with shareholding, subject to the applicable legal requirements. Repayment of a shareholder loan addresses a separate debt.
Combining these payments under an informal understanding invites disagreement. One shareholder may regard a payment as overdue remuneration while another sees it as an improper withdrawal.
The agreement should identify how remuneration is approved and how conflicts are handled when a person participates in decisions affecting their own pay.
If departure triggers a compulsory share sale, the relevant events, procedure and price mechanism need particular care. A resignation, retirement, dismissal and prolonged incapacity should not automatically produce identical consequences.
3. Funding and dilution
A growing business can be profitable on paper and still need additional cash. Equipment, recruitment, stock and expansion may all require funding before the resulting income arrives.
The agreement should explain how funding requests are made and whether shareholders have an obligation to contribute. An expectation that everyone will “help when necessary” is too uncertain to rely on.
Decide whether the money is a loan or an investment
A shareholder loan and a subscription for new shares have different consequences.
Loan terms should address matters such as interest, repayment, security and any agreed postponement of repayment. An equity contribution requires agreement on the share issue and its effect on ownership and voting rights.
Before approving further funding, shareholders should understand:
- How much money is needed and why.
- Whether borrowing or investment is proposed.
- Who may provide the funding.
- How the proposed terms will be approved.
- What happens if the required amount cannot be raised.
These commercial arrangements must also comply with the Companies Act and the company’s governing documents. A private agreement cannot replace the approvals and procedures required for a particular transaction.
Explain what happens when someone cannot contribute
Suppose two shareholders each own half the company, but only one can fund an urgent expansion. The contributing shareholder may expect a larger stake. The other may believe the original ownership split should remain intact.
Neither expectation resolves the issue by itself.
The agreement should establish a process for considering alternatives and, where new equity is appropriate, determining the subscription price and resulting dilution. Dilution means a shareholder’s percentage ownership decreases because additional shares are issued.
Shareholders should be able to see the proposed ownership position before approving the transaction. An unexplained percentage buried in supporting paperwork is a poor foundation for informed agreement.
4. Share transfers and valuation
A shareholder’s departure can affect everyone who remains. A new owner may bring different expectations, financial demands or commercial interests.
Transfer provisions should therefore address whether shares may be sold freely, whether existing shareholders receive an opportunity to buy first and which approvals are required.
Describe the transfer procedure
A useful clause identifies the notice to be given, the information it must contain and the period within which other shareholders must respond.
It should also explain what happens if the proposed purchaser changes or the eventual sale terms differ from those originally offered.
The agreement should consider events beyond a voluntary sale. Death, incapacity, insolvency and divorce may affect ownership or create pressure for a transfer. Their consequences depend on the relevant facts and law, so a clause should describe the intended process rather than assume each event automatically transfers the shares.
Give “fair value” a workable meaning
A promise to pay fair value is incomplete without a method for establishing it.
The parties should consider who appoints the valuer, what information must be supplied, the valuation date and how shareholder loans are treated. They should also decide whether any minority or marketability discount applies and how valuation costs are allocated.
Cliffe Dekker Hofmeyr’s discussion of binding share valuations illustrates why the wording matters. In the case examined, the Supreme Court of Appeal held that the valuers could not unilaterally replace their published determination where the agreement made it final and binding.
Payment terms deserve equal attention. An agreed price is of limited practical use if the buyer cannot pay it. Instalments, security, interest and consequences of default should be considered before a transfer becomes urgent.
5. Deadlock and exit
Equal ownership can feel fair when a business begins. It can also leave two shareholders unable to approve an essential decision.
A deadlock clause should define the circumstances that trigger it. An isolated disagreement should not necessarily allow someone to force a sale of the business.
Create a sequence with deadlines
A practical process might begin with a formal discussion, followed by mediation. A defined accounting or valuation question may be suitable for expert determination. If the relationship cannot be repaired, the agreement may provide for a structured purchase or sale.
Each stage needs a timeframe. An obligation to negotiate indefinitely offers little help when the company is running out of money.
The agreement should also consider how essential operations continue while the dispute is being addressed. Employees, suppliers and customers should not be left waiting for the shareholders to resolve their relationship.
Consider whether both shareholders can afford the exit mechanism
Some clauses allow one shareholder to name a price at which the other must either buy or sell.
That may appear balanced, but financial capacity matters. A shareholder who cannot raise purchase funding may have little real choice. Cliffe Dekker Hofmeyr’s guidance on shareholder deadlocks highlights the risk of such mechanisms favouring the financially stronger party.
Address sales involving majority and minority shareholders
A tag along right generally allows qualifying shareholders to join another shareholder’s sale on the agreed terms. A drag along provision may require other shareholders to participate in a sale when its specified conditions are met.
These rights need clear thresholds, notice procedures and protection around price and payment terms. Compulsory transfers following serious misconduct also require carefully defined grounds and a fair process for establishing whether they apply.
The clause people forget: consistency with the MOI
In South Africa, the memorandum of incorporation, commonly called the MOI, is central to the company’s governance.
Section 15(7) of the Companies Act requires a shareholder agreement to be consistent with the Act and the company’s MOI. A conflicting provision is void to the extent of the inconsistency.
Cliffe Dekker Hofmeyr’s analysis of a 2025 judgment shows the practical risk: agreed voting arrangements conflicted with the MOI and could not be enforced as the parties intended.
The documents should therefore be reviewed together. Necessary amendments and approvals should be completed when the arrangement is implemented.
Write for the disagreement you hope never happens
Before signing, test the agreement against ordinary business difficulties. What happens if a founder stops working, funding is urgently needed, a buyer approaches one shareholder or the owners cannot agree on a sale?
If the answer depends on everyone remaining reasonable and cooperative, more detail may be needed.
A good shareholder agreement reflects the particular business and the people investing in it. It gives them a clear way to make decisions, resolve disagreement and leave on understood terms while preserving the value they have built.
