Two people can agree on a business idea and still have very different expectations about how the company will run. One expects a salary from the first month. The other expects every available rand to stay in the business. Both believe their understanding was obvious.
A shareholders agreement helps turn those assumptions into an agreed arrangement. It should work alongside the company’s Memorandum of Incorporation, or MOI, and the Companies Act. A template signed quickly is less useful than a document that addresses the decisions your particular business will face.
Understand the documents before choosing a template
The MOI is a central company document. It sets out governance arrangements within the Companies Act’s framework. A shareholders agreement is a contract that addresses arrangements among the shareholders who are parties to it.
These documents cannot safely be drafted in isolation. Section 15 of the Companies Act deals with their relationship. A shareholders agreement must be consistent with the Act and the MOI; an inconsistent provision is void to the extent of the inconsistency.
CIPC’s guidance on a private company with a standard MOI explains the role of the MOI. For the governing legislation, consult the Companies Act. Ask an attorney to check whether the standard MOI fits the ownership arrangement you intend.
Record who owns what
Set out the agreed shareholding and check it against the company’s securities records. Being a director does not, by itself, establish that someone owns shares. Paying money into the business does not automatically answer the question either.
Distinguish an investment for shares from a shareholder loan. Record the amount, when it must be paid and what happens if a promised contribution is not made. If one owner contributes equipment or intellectual property, describe it and explain the intended ownership.
For example, one founder may provide R100,000 while another provides a software product. The agreement should not leave the software’s ownership unresolved while treating both contributions as settled. Ask whether the company receives ownership, a licence or something else.
Separate ownership from daily work
Shareholders, directors and employees perform different roles. One person can occupy all three, but the arrangements still need to distinguish them.
State who will work in the business, what responsibilities they will carry and how remuneration will be determined. Employment or service terms may need a separate agreement. A promise to “help where necessary” is unlikely to resolve a later dispute about hours or performance.
Discuss what happens if an owner stops working but keeps their shares. Does the business continue paying them? Can their operational responsibilities be reassigned? Does a share transfer mechanism apply? These are choices to settle deliberately, within the law, rather than conclusions that follow automatically from disappointment.
Consider what happens if one founder stops working in the business but remains a shareholder. Their ownership rights do not necessarily disappear because the other founder is doing the daily work. Discuss employment, remuneration, voting and any agreed departure mechanism as separate matters, and ensure the documents support the intended arrangement.
Keep the agreement under review as the company grows. Bringing in an investor, taking on significant debt or changing the founders’ roles may expose gaps that were not important at the start. A planned review is easier to manage than attempting to rewrite the agreement after the relationship has broken down.
Decide how important decisions will be made
Not every purchase needs every shareholder’s approval. Equally, one person should not be able to make a major commitment merely because they usually handle suppliers.
Identify decisions that require particular approval. These might include substantial borrowing, issuing shares, selling a major asset or entering a transaction with an owner. Make the approval threshold clear and ensure that it is consistent with the company documents.
Use realistic amounts and procedures. If the threshold is so low that buying ordinary stock requires a meeting, the business may struggle to operate. If it is too high, an owner may take risks the others never intended to permit.
Record who can sign contracts and how authority is communicated. An internal agreement should be supported by practical banking and approval arrangements, not left in a drawer while everyone acts differently.
Agree how money will be handled
Discuss remuneration, reimbursement of expenses, shareholder loans and distributions separately. They are not interchangeable ways to take money out of a company.
A profitable month does not automatically mean that all available cash should be distributed. The company may need money for tax, stock or commitments falling due later. Distributions are also subject to the Companies Act’s requirements, including the relevant solvency and liquidity framework.
Ask how accounts and budgets will be shared. Decide how frequently owners receive financial information and who prepares it. A shareholder who receives no information may begin to mistrust perfectly ordinary spending, while another may be unable to explain informal withdrawals.
For a small business, a consistent monthly report can be more useful than an ambitious reporting promise nobody follows. Choose an arrangement you can maintain.
Plan for new funding and changes in ownership
The company may need more capital. Decide whether shareholders must contribute, whether contributions are optional and what happens if one person cannot afford to participate. Any effect on shareholding needs careful drafting.
Consider share transfers too. Can an owner sell to anyone? Must existing shareholders first have an opportunity to buy? How will the price be determined? What happens if no buyer is available?
Avoid assuming that a percentage of ownership always gives a straightforward percentage of the company’s value. Valuation can be affected by debts, the company’s prospects and the terms of the agreement.
A workable valuation mechanism should identify who determines the value, what information they use and who pays their fee. “A fair price agreed later” is precisely the point on which departing owners may fail to agree.
Deal with deadlock before it happens
Equal ownership can seem fair at the start, but it can produce deadlock. If two owners each control half the votes and disagree about an essential decision, the company needs a way forward.
Start with practical escalation: a meeting, exchange of information and independent assistance where appropriate. More decisive mechanisms may be needed, but understand their financial effect before accepting them.
A clause allowing one owner to force a purchase can disadvantage someone who cannot raise money quickly. Do not choose an impressive sounding exit mechanism without testing it against the owners’ circumstances.
Consider an example in which one owner wants to expand and the other wants to reduce risk. The dispute procedure should encourage a decision about the business, while giving a clear route if agreement remains impossible.
Prepare for death incapacity and departure
Discuss what happens if a shareholder dies, becomes unable to participate or wants to leave. Estate administration, funding and share transfer restrictions can interact. A surviving owner cannot assume they automatically inherit or acquire the deceased person’s shares.
Check whether insurance or another funding arrangement is appropriate and whether it matches the agreement. Update the documents when ownership or family circumstances change.
Keep the signed agreement, current MOI, securities records and important resolutions together. CIPC’s company records guidance explains categories of records a company must maintain.
Have the difficult conversation while you still agree
Before signing, ask each owner to explain the arrangement in their own words. If the explanations differ, the document has not yet done its job.
A useful shareholders agreement reflects the business you intend to build and the problems you can reasonably foresee. Settling those points early protects the working relationship as much as the paperwork.
