A shareholder agreement is easiest to negotiate when everyone gets on. The clauses that matter most are the ones for when they do not.
When equal shareholders fall out
In Thunder Cats Investments 92 v Nkonjane Economic Prospecting and Investment [2013] ZASCA 164, two equal shareholders in a small company fell out. The Supreme Court of Appeal held that the “just and equitable” ground for winding up in section 81(1)(d)(iii) of the Companies Act 71 of 2008 is not limited to the deadlock situations listed in the earlier paragraphs of that section. A company can be wound up where the relationship between equal shareholders has irretrievably broken down.
A clause in the shareholder agreement that excluded deadlock as a ground for winding up did not stop the application. Because the blame for the breakdown was roughly equal, the court upheld the liquidation order.
What this means for your agreement
If the only way out of a broken relationship is a court order that winds the company up, the business may be lost. It is better to agree early:
- How decisions are made when the shareholders disagree.
- A deadlock process with steps before anyone goes to court, such as negotiation, mediation or arbitration.
- How a shareholder can leave, and how the shares are valued.
- What happens if a shareholder dies, is sequestrated or stops working in the business.
The Companies Act also gives shareholders and directors a remedy against oppressive or unfairly prejudicial conduct, in section 163. An agreement that deals with these situations in advance gives you more control than relying on a court.
This article is general information and is not legal advice. The law may have changed since it was published, and every matter turns on its own facts. Contact us about your own situation.