Speaker 1: This video has everything that you need to know about shareholder's agreements and highlights the most important clauses that should be in every shareholder's agreement. For example, clear guidelines on resolving scenarios such as what happens if a shareholder fails to contribute financially to their share of the investment, or how to value your shares if you want to sell them to another shareholder. Agreements on issues like these can dramatically increase the likelihood of conflict between the shareholders which could either lead to destruction of value, litigation, or even business closure. This is why the shareholder's agreement is so important as its primary function is to protect shareholder's rights and provide clear guidelines for resolving disputes. It goes without saying that a shareholder's agreement is only required if there are two or more shareholders in the company. Some of our clients get confused between partnership agreements and shareholder's agreements. Whilst they are similar in nature, they refer to different legal structures. A shareholder's agreement is used for registered companies which have directors and shareholders while a partnership agreement is used if there is no legal entity. Therefore, partnership agreements are between sole proprietors and do not offer the benefit of limited liability protection, meaning each partner can be held personally or jointly liable. It is always smarter to finalise a shareholder's agreement from the start as the business is unlikely to have been trading long enough to face any major challenges. In addition, the mood amongst the shareholders is usually enthusiastic and positive at the start of a business, which makes it so much easier for everybody to agree on the shareholder's agreement. To understand shareholder's agreement, you need to be aware of the legal hierarchy in terms of legislation which governs companies. The overarching legislation is the Companies Act which governs all companies followed by the Memorandum of Incorporation which addresses the rights and duties and responsibilities of the directors and the shareholders, and then finally the shareholder's agreement which covers issues such as management of the company and dispute resolution. These three legal frameworks need to work in harmony with each other, however, if any clauses in the shareholder's agreement are in conflict with the MOI, then the MOI will take precedence over the shareholder's agreement. The same will apply to the MOI and the Companies Act where the Act will take precedence over the MOI. Shareholder's agreements can be long and complicated documents. I have seen shareholder's agreements with over 150 pages with a multitude of clauses which has audit requirements, independent reviews and employee shareholder schemes, which do not apply to the average South African private company. With this in mind, we have prepared a 12-page standard shareholder's agreement which is suitable for most private companies and compliant with both the standard MOI and the Companies Act. The link is in the description. The shareholder's agreement should set out the usual rules and procedures of appointing and removing directors as well as their voting rights. For example, the chairman should have the casting vote in the event of a tied vote. With most private companies, the directors are usually also the shareholders, however, it is important to differentiate between the roles of the directors and the shareholders. Just to be clear, directors manage the company and the shareholders own the company. The shareholders are required to have their own separate meetings and the agreement should set out the usual quorums and proxy requirement for these meetings. However, when it comes to shareholders' voting rights, we do separate between voting by hand and voting by poll. Voting by hand is restricted to one person, one vote, while voting by poll equates to the number of votes relative to the percentage shareholding. This is a very subtle but important difference in terms of controlling the company. All company meetings, be it director meetings or shareholders' meetings, follow the same procedures, namely, proposals are presented during the meeting, which are then discussed and voted on. The results are then written down in what is called a resolution, which becomes legally binding. It is therefore important to understand the difference between an ordinary and a special resolution. An ordinary resolution requires a simple majority vote of 51% to pass it, while a special resolution requires a clear majority to pass the resolution. We set the special resolution requirements at 75% of the vote. So why is this important? The special resolutions add more protection for the shareholders as it forces a majority agreement on certain key decisions, such as any changes to the MOI, the authorised share capital, issuing new shares, decisions on directors' remuneration, declaring a dividend and approving the budget. As mentioned in my introduction, the valuation of shares can be a thorny issue as there are so many different methods of determining the fair market value of a share, and each method could deliver a different result. We have opted to use the net asset value of the company, which is based on the present value of future earnings valuation method and applied to the latest financial statements. By agreeing on the method of valuation of company shares up front, many potential disputes can be avoided. Part of the valuation process is to appoint an independent valuer whose decision is final and binding. The agreement stipulates that the independent valuer must value all shares on the same principle and not add a premium should the sale of the shares in question result in a controlling interest, neither should the sale of a minority shareholder be discounted. By following these principles set out in the agreement, both the majority and minority shareholders are protected. One of the cornerstones of private companies versus public companies is that shareholders have the right of first refusal, meaning the existing shareholders have first option to buy any existing shares that become for sale. For example, if a third party offers to purchase an existing shareholder's shares, then the remaining shareholders have 30 days to match the offer. The shareholders also have pre-emptive rights, meaning that should the company issue more shares, then the existing shareholders have the right to purchase the new shares in the same proportion so that they can maintain a similar percentage ownership. On the topic of buying and selling shares, there are two clauses I particularly like, the drag-along and tag-along clause, which means that if the company is approached by a third party who would like to buy 100% of the company, and 75% of the shareholders agree to the terms of the sale, then the remaining 25 are obliged to sell their shares on the same terms, hence the term drag-along. Now the converse also applies, which means the minority shareholders can block the sale of the company if they are not offered the same terms, which is why the clause is called tag-along. Out of the many services we offer to our clients, I think the shareholders agreement is one of the most valuable services. It has been drafted by an advocate with years of experience in company law and offers exceptional value. I hope you found this informative, so as always remember, we are here to help.