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When a company has more than one shareholder, a shareholders' agreement is one of the most important documents it can have. It is a private contract between the shareholders that sets out their rights, responsibilities, and how key company decisions will be made.
While a company's Memorandum of Incorporation (MOI) governs its external legal structure, the shareholders' agreement governs the internal relationship between the owners. It provides clarity on matters such as how shares may be sold or transferred, how directors are appointed, and how disputes will be resolved. It can also regulate issues like dividend policy, funding obligations, and what happens if a shareholder dies or wants to exit the business.
A well-drafted shareholders' agreement promotes stability and fairness. It helps prevent conflict by ensuring all shareholders understand how the business will be managed and how their interests will be protected. Importantly, it also safeguards minority shareholders, who might otherwise have limited influence under company law alone.
Although not required by legislation, every multi-shareholder company should have one. It can be tailored to the size and nature of the business, from small family-owned companies to large private entities, and is best prepared by a commercial attorney familiar with corporate governance and the Companies Act 71 of 2008.
Ultimately, a shareholders' agreement is a blueprint for partnership. It allows the business to operate with predictability, fairness, and mutual trust, while protecting both the company and its investors when circumstances change.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
