In this week’s podcast, Nirvana Nothnagel takes a closer look at shareholders’ agreements. She discusses what a shareholders’ agreement should cover, how it relates to directors’ duties and a company’s MOI, whether new shareholders are automatically bound by its terms, and the key risks shareholders need to consider.
Transcript
[00:08][Eon] Welcome to Legal Talk here on eRadio SA with Hahn & Hahn Attorneys. Nirvana Nothnagel joins us today to talk about a shareholders agreement, why it's so important, the legal status of it, what it covers, and so much more, and also the risks involved. So, let's chat to Nirvana. Welcome back, Nirvana, to Legal Talk. Nice to chat to you again.
[00:34][Nirvana] Always lovely to chat to you, Eon.
[00:36][Eon] Likewise. Now, Nirvana, what is a shareholders agreement?
[00:41][Nirvana] A shareholders agreement is a contract between the various shareholders. It sets out how they'll manage their relationship, make decisions, deal with shares, and resolve disputes.
[00:53][Eon] And why would you say is it important?
[00:55][Nirvana] So, it's important because it gives shareholders clear rules upfront, and this helps prevent disputes, and deals with issues such as control, funding, transfer of shares, exiting shareholders, confidentiality, and deadlocks.
[01:11][Eon] And is it compulsory for a company to have a shareholders agreement?
[01:15][Nirvana] It's not necessarily compulsory to have a shareholders agreement. However, it is advisable for the reasons I mentioned before. However, one would also need to ensure that it does not contradict the company's Memorandum of Incorporation and the Companies Act.
[01:29][Eon] All right, and what is its legal status?
[01:33][Nirvana] A shareholders agreement is enforceable as a contract, but it must also be consistent, once again, with the Companies Act and the company's Memorandum of Incorporation.
[01:42][Eon] And what is needed for a valid agreement?
[01:46][Nirvana] It should be in writing. It should identify the parties and the company, clearly record the shareholders' rights and obligations, be signed by the relevant parties, and comply, once again, with the Companies Act and the Memorandum of Incorporation.
[02:01][Eon] And, Nirvana, what should it cover?
[02:03][Nirvana] A good shareholders agreement usually covers how directors are appointed and decisions are made, which matters need shareholders' approval, how shares may be transferred or sold, valuation of shares, how that would work, what happens in the event of a death of a shareholder, what happens if a shareholder merely wants to exit the shareholding relationship, how the company will be funded, how deadlocks and disputes will be resolved. Then, there's also aspects such as confidentiality, restraints, and intellectual property that can be dealt with in a shareholders agreement, and also what happens if someone breaches the agreement.
[02:42][Eon] And can it override directors' legal duties?
[02:46][Nirvana] The directors must still comply with their duties under the Companies Act. A shareholders agreement cannot require directors to act unlawfully or against their fiduciary duties.
[02:56][Eon] And should it match the MOI?
[02:59][Nirvana] Yes, the shareholders agreement should be checked against the Memorandum of Incorporation, so that the two documents do not contradict one another. And if it does contradict one another, the necessary amendments need to be affected on both the documents to align them.
[03:15][Eon] And is a new shareholder automatically bound?
[03:19][Nirvana] So, new shareholders should usually sign, for, for instance, a deed of adherence, so that they become bound by a shareholders agreement. Ideally, they would enter into an updated shareholders agreement to be bound to the shareholders.
[03:33][Eon] And just finally, Nirvana, what are the main risks?
[03:37][Nirvana] So, the main risks include conflict with the Memorandum of Incorporation and the Companies Act. So, this is where you've not checked your drafted shareholders agreement against these documents and as well as the Act, unclear valuation or deadlock clauses, not binding future shareholders, unenforceable restraints, and failing to deal properly with exiting shareholders or funding defaults. So, this is why it's essential to ensure that the Memorandum of Incorporation and shareholders agreement correspond, and that all aspects of the shareholding needs are considered and then incorporated into the agreement, and then those amendments, if necessary, affected onto the Memorandum of Incorporation.
[04:20][Eon] And that's all you need to know about shareholders agreements. Thanks to you, Nirvana, for joining us today here on Legal Talk.
[04:29][Nirvana] Thanks for having me back, Eon.