Entrepreneurs often enter into business partnerships with optimism, focusing on growth and innovation rather than potential disputes. Unfortunately, this forward-looking mindset sometimes leads to overlooked formalities, such as drafting a shareholders' agreement. While this document may seem secondary in the early stages of a business, its absence can result in significant complications, particularly when a shareholder wishes to sell their equity.
In South Africa, the sale of shares is governed by the Companies Act and any provisions in the company’s Memorandum of Incorporation (MOI). In the absence of a shareholders' agreement, the MOI becomes the primary document outlining the process for transferring shares. If the MOI lacks detailed provisions on share transfers, the default rules under the Companies Act apply. This can lead to delays or disputes, especially if other shareholders refuse to cooperate by signing the necessary resolutions or documents.
When a shareholder wishes to sell their equity, their first step should be to review the company's MOI. This document might contain restrictions, such as a preemptive rights clause requiring the selling shareholder to offer their shares to existing shareholders before selling to an external party. If no such provisions exist, the shareholder generally has the right to sell their shares to any willing buyer. However, the cooperation of other shareholders or the board may still be needed to finalize the process, which can be a sticking point in the absence of mutual understanding or formal agreements.
If the other shareholders or directors block the process unreasonably, the selling shareholder can seek legal remedies. One option is to approach the courts to compel compliance with the Companies Act or the MOI. Another avenue is to claim oppression under Section 163 of the Companies Act, which protects shareholders from unfairly prejudicial or discriminatory conduct by the company or its co-owners. This route, however, requires demonstrating that the actions of the other shareholders or directors are unjustifiably harming the selling shareholder’s interests.
Without a shareholders' agreement, the selling shareholder may also consider negotiating directly with the other shareholders. A mediated discussion can often resolve disputes faster and more cost-effectively than litigation. The selling shareholder might offer terms that make the sale more attractive or propose alternative solutions, such as selling to a third-party buyer approved by the remaining shareholders.
To avoid such challenges in the future, businesses should prioritize drafting a comprehensive shareholders' agreement at the outset. This document can include provisions for share sales, dispute resolution mechanisms, and clear procedures for handling uncooperative shareholders. For businesses already in operation, it’s never too late to create one. Seeking legal advice and proactively addressing these issues can save time, money, and strained relationships down the line.
In conclusion, while the lack of a shareholders' agreement complicates the sale of shares, options are available to the selling shareholder. Whether through legal action or negotiation, it is possible to navigate the challenges and complete the sale. However, the best solution lies in prevention: a well-drafted shareholders' agreement can provide clarity and safeguard against disputes, allowing entrepreneurs to focus on growing their business.
The StartUp Legal offers expert legal services tailored for SMEs, helping you secure a winning edge. For personalized support, book a complimentary consultation: https://calendar.app.google/RpVJ1Usc2jqA7fYH6 or email us at hello@thestartuplegal.co.za.
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