Shareholders Agreement in South Africa: What It Must Say

What a shareholders agreement does in South Africa, how it ranks below the Companies Act and your MOI, the clauses to include, and when to get an attorney.

A shareholders agreement in South Africa is a private contract between some or all of a company's shareholders. It sets out how they will run the company together, what happens when someone wants out, and how disputes get settled. The law does not require one. But it can only work inside the Companies Act 71 of 2008 and the company's Memorandum of Incorporation (MOI), and most of the costly mistakes come from forgetting that.

This guide explains where the agreement sits in the legal hierarchy, which clauses do real work, the traps that make clauses void, and when to bring in an attorney.

TL;DR

A shareholders agreement is not mandatory in South Africa. Governance is set by the Companies Act and your MOI, and the agreement adds private terms on top.
The hierarchy is fixed: Act first, MOI second, shareholders agreement last. A clause that contradicts the Act or the MOI is void to that extent.
Use the agreement for what the MOI does not cover well: exit rules, deadlock, restraints, funding and dividend policy. If the MOI itself is wrong, amend the MOI.
Negotiate the MOI and the agreement together, as one package, and keep your share register up to date.
Get an LPC-registered attorney to draft or review it before anyone signs.

What a shareholders agreement actually is
Is a shareholders agreement compulsory?
The hierarchy: Act, then MOI, then agreement
The dead-MOI trap
Negotiate the MOI and the agreement as one package
Clauses that do real work
Shareholders, directors and responsibilities
Keep your securities register in order
Our perspective
When to use an attorney, and what to ask
Find an attorney for your agreement
A short checklist before you sign
FAQ
Sources

What a shareholders agreement actually is

Think of the company's constitution and the shareholders' own deal as two different documents with two different audiences.

The MOI is the company's constitutional document. Under the Companies Act it binds the company and each shareholder, and binds shareholders among themselves. It is a public document held at the Companies and Intellectual Property Commission (CIPC).

A shareholders agreement is a contract. It binds only the people who sign it. It does not need to be filed with CIPC, which makes it the right place for terms you would rather not have on the public record, such as how a departing shareholder is paid out or how a stalemate is broken.

It can be signed by all shareholders or only some. A two-founder start-up will usually have every shareholder sign. A company with a large body of passive investors may have an agreement among a smaller group of shareholders who hold the control.

What a shareholders agreement actually is — overview diagram

Is a shareholders agreement compulsory?

No. A company can exist and operate with only its MOI and the default rules of the Act. The Chambers corporate governance guide for South Africa describes the relationship between a company and its shareholders as both statutory and contractual, regulated by the Act and the MOI, with a shareholders agreement as an optional extra layer.

That said, "not compulsory" is not the same as "not needed". If you are one of two or three owners, and the business is worth more than the legal fee, the agreement is the document you will reach for the day a relationship sours. Without it, you are left with the default rules and a court.

The hierarchy: Act, then MOI, then agreement

This is the single idea that decides whether your agreement works. Burger Huyser Attorneys, in their explanation of whether an agreement can override the Companies Act, put it as a statutory hierarchy: the Companies Act is supreme, the MOI prevails over a shareholders agreement, and the agreement sits at the bottom.

Hierarchy of company law and governing documents

Section 15(7) of the Act is where this bites. Any provision of a shareholders agreement that is inconsistent with the Act or the MOI is void to the extent of the inconsistency. You can read the section yourself in the Companies Act on Acts Online.

What "void to the extent" means in practice

The rest of the agreement survives. Only the offending part falls away. But the part that falls away is often the one you cared about most.

Take an example. Two founders agree privately that neither may sell shares without the other's consent. The MOI, however, says shares are freely transferable. The restriction in the agreement is at risk, because it contradicts the constitution. The safer route is to put the restriction in the MOI as well, so the two documents say the same thing.

The dead-MOI trap

The most common pitfall is what could be called the dead-MOI trap. Shareholders discover that their MOI is deficient, often because it is a standard form filed when the company was registered. They then try to fix the problem by adding a clause to the shareholders agreement.

It does not work. If the clause contradicts the MOI, section 15(7) makes it void. If the governance structure is wrong, the fix is to amend the MOI through CIPC, not to write a cleverer agreement.

A related myth is the "bulletproof" non-variation clause. Some agreements say they can only be changed in writing with unanimous consent. Burger Huyser Attorneys note that a later, validly adopted MOI will still override the agreement, because the hierarchy cannot be contracted out of.

Negotiate the MOI and the agreement as one package

David Pinnock of Cliffe Dekker Hofmeyr warns that shareholders often negotiate the two documents separately. His advice, set out in CDH's note on why the MOI trumps shareholder arrangements, is to agree them as a single consistent package. Otherwise you can end up with irreconcilable conflicts that courts may be reluctant to resolve through piecemeal amendments.

In practical terms:

Draft both documents at the same time, by the same attorney.
List every right you want (board seats, vetoes, transfer limits) and decide which document carries it.
Put anything the public may see, and anything that must bind the company itself, in the MOI.
Put the private commercial deal between owners in the agreement.
Read the two side by side before signing, looking for contradictions.

Clauses that do real work

A good agreement is not long for the sake of it. Each clause answers a question that will otherwise become a fight. The following are the ones most owner-managed companies need.

Clause	Question it answers	Watch out for
Share transfer restrictions	Can a shareholder sell to an outsider?	Must not contradict the MOI
Pre-emptive rights on transfer	Do existing owners get the first chance to buy?	Define the price and the time limit
Tag-along and drag-along	Can a minority join, or be forced into, a sale?	These exist only if the agreement or MOI creates them
Deadlock resolution	What happens in a 50/50 stalemate?	Choose an escalation path before you need it
Exit and valuation	How is a leaver's stake priced and paid?	Name a valuation method and a payment timetable
Restraint of trade	Can a leaver compete with the company?	Keep it reasonable in scope, area and duration
Dividend and funding policy	When is profit paid out, and who funds shortfalls?	Align with the Act's rules on distributions
Board and reserved matters	Which decisions need every owner's consent?	Check how it fits the MOI
Confidentiality	What may owners disclose?	Cover former shareholders as well

The categories above, including pre-emptive rights, drag-along and tag-along, deadlock mechanisms and restraints, match how one South African firm's guide to key clauses describes the typical contents.

Deadlock deserves the most thought

In a company owned 50/50, any disagreement on a major decision can freeze the business. Common tools are a cooling-off period, mediation, an independent casting vote, a buy-sell mechanism where one owner names a price and the other chooses to buy or sell, or an agreed winding-up as a last resort. Pick the ladder while you still get along. After the quarrel starts, nobody will agree to anything.

Exit terms save relationships

Most owner disputes are really exit disputes: someone wants to leave, die, divorce or stop working. Decide in advance what happens in each case, and how the shares are valued. If a shareholder is married in community of property, their spouse may have a claim on the shares, so it is worth reading our guide to community of property in South Africa before you draft the exit and transfer clauses.

Shareholders, directors and responsibilities

Two of the questions people search for most are covered by the Chambers guide and are worth stating plainly.

Can you be a shareholder without being a director? Yes. A shareholder is the holder of a share issued by the company and entered in its securities register. Directors are a separate role. A director has specific statutory duties under the Companies Act, while a shareholder has no legal duty to the company in that sense.

What are shareholders entitled to? A share of distributed profits in proportion to their holdings. Because of the company's separate legal personality, shareholders are generally not liable for the company's acts or omissions. Professor Michael Katz notes in the same guide that a court may pierce the corporate veil only in exceptional circumstances of unconscionable abuse.

This is also why the agreement is used mainly to regulate private relations between owners, not to try to change statutory protections.

Keep your securities register in order

A shareholders agreement refers to shares, so the record of who holds what must be right. Every profit company must maintain a securities register under section 50 of the Companies Act. According to a CIPC webinar on company shares, the register is proof of ownership, recording holders' names, contact details and the number and class of shares. CIPC keeps records of authorised shares in the MOI but not of issued shares, so the company must manage its own register.

Update it every time shareholding changes. A neglected register can also complicate the filing of beneficial ownership at CIPC. And when a new investor arrives, the share issue itself must fit within the shares the MOI authorises, since a company cannot issue shares that have not been authorised.

Our perspective

We see the same pattern from the legal-help side. People come looking for a lawyer after the relationship has already broken down, when the only document is a template downloaded years ago. The template is rarely the problem. The problem is that nobody checked it against the MOI.

Our advice is simple. Treat the agreement as part of company set-up, not as an extra. Ask the attorney how the agreement and the MOI fit together, and ask for both documents to be delivered at the same time. A short agreement that is consistent with the MOI will protect you more than a long one that is partly void.

We also think you should be able to verify who you are hiring. Every attorney on Justibly is shown according to Legal Practice Council data, and listings are not ranked by payment. For a corporate matter, you want someone whose registration you have checked and whose experience in company work you have asked about.

— Nkosi

When to use an attorney, and what to ask

A template can help you understand the topic, but a template cannot know your MOI, your funding plans or your family circumstances. Get an attorney involved if any of these apply:

Shareholders put in unequal money, time or skills.
One shareholder is an investor and the others work in the business.
You plan to bring in new investors or staff shareholders.
The company has a standard MOI that has never been reviewed.
Any owner is married in community of property or has a complicated estate.

It helps to know what a corporate attorney actually does; our page on what a corporate lawyer does sets out the work. Before you appoint anyone, use our list of 12 questions to ask a lawyer, which includes how to check their LPC status. If cost is a concern, see where to get free legal advice in South Africa.

Good questions for the first meeting:

Will you review my MOI, and will you draft any MOI amendments alongside the agreement?
Which of my wishes belong in the MOI and which in the agreement?
Will the fee be fixed or hourly, and what does it cover?
How will you deal with a deadlock if we hold 50/50?
Who keeps the signed original, and who updates the share register?

Find an attorney for your agreement

On Justibly you can search LPC-registered attorneys by practice area and location across all nine provinces, and ask the free Q&A forum a quick question first. Answers there come only from registered attorneys. Search for corporate or commercial attorneys near you, compare their profiles, and book through the appointment matching service.

A short checklist before you sign

Have you read the MOI and agreed it is consistent with the agreement?
Does every restriction on share transfers appear in the MOI too?
Is there a deadlock mechanism, and does it work for your ownership split?
Are exit, death, divorce and disability covered, with a valuation method?
Is the restraint of trade reasonable?
Is the securities register current?
Has every shareholder who must be bound signed?
Has an LPC-registered attorney reviewed the lot?

If a dispute does reach the courts, our overview of courts in South Africa explains where matters are heard.

FAQ

Is a shareholders agreement mandatory in South Africa?

No. The Companies Act and your MOI already govern the company. A shareholders agreement is an optional private contract, but it is the best way to settle exit, deadlock and funding questions in advance.

Does a shareholders agreement need to be registered with CIPC?

No. Unlike the MOI, which is a public document, the agreement does not need to be filed with CIPC. That keeps its commercial terms private, provided they do not contradict the MOI or the Act.

Can a shareholders agreement override the MOI?

No. The MOI prevails over the agreement, and the Companies Act prevails over both. A clause that conflicts with the MOI is void under section 15(7) to the extent of the conflict. If the MOI is wrong, amend the MOI.

How do I get a shareholder certificate?

The company issues it, and the company keeps the securities register that records your holding. Ask the company secretary or directors, and check that your name, contact details and the number and class of shares are correct in the register.