Shareholders' Agreement Template - Organising Ownership and Business Relationships

What a shareholders' agreement is

A shareholders' agreement is a private agreement between a company and its shareholders. It sets out arrangements for ownership, transfers, funding, valuation, decision-making consequences and other matters affecting the relationship.

This template is entered into by the company and two named shareholders. It records:

• The company: its name, registration number, address and signatory.
• Each shareholder: their name, identification or registration number and physical address.

The template is designed for a South African private company. It refers to the company's Memorandum of Incorporation (MOI), the Companies Act No. 71 of 2008 and the laws of the Republic of South Africa. Compare it with the MOI, share records and existing arrangements before signing. Tailoring matters most where there are more shareholders, different share classes, outside investors, trusts, group companies or regulated activities.

When to use it

Use the template when a company and its identified shareholders want a written framework for:

• share transfers
• specified events affecting a shareholder
• valuation
• funding and guarantees
• defaults
• distributions
• confidentiality and notices

It is especially useful before a relationship becomes strained, because the agreement sets out processes while the parties can still exchange information and make decisions deliberately.

The template is built around a company and two shareholders. Review it if there are additional shareholders or if a shareholder does not fit the fields. Confirm that its assumptions about shares, loans, valuation and board involvement reflect the actual arrangement.

Ownership and transfers

Definitions. The agreement begins with definitions and interpretation provisions. These cover terms such as Agreement, Board, Business Day, Company, Director, Founding Documents, Market Value, Memorandum, RSA, Shares, Signature Date and Valuer, and include references to the Companies Act and the MOI.

Pre-emptive rights. A shareholder may not transfer an interest, create a right or option over it, or encumber it, except in line with this clause or the relevant MOI provisions read with the Companies Act. The process works as follows:

1. Transfer Notice. A shareholder who wants to sell all or part of an interest must first offer it to the other shareholder in writing. Where a bona fide third-party offer exists, the notice includes the proposed purchaser, the price and other material terms.
2. Acceptance. The remaining shareholder has 15 Business Days to accept the offer for all of the sale interest.
3. Market Value option. The agreement covers the case where the remaining shareholder buys at Market Value rather than a higher price stated in the notice. It provides for information to a Valuer, consideration of relevant factors, and sharing the cost of the Market Value certificate.
4. Completion. Completion is contemplated within 15 Business Days after acceptance, subject to the provisions on approvals.

Sale to a third party. If the internal right is not exercised, the selling shareholder may proceed with a bona fide arm's-length sale to the third-party purchaser at the stated price, subject to conditions. The agreement addresses:

• a purchaser that is a competitor or subsidiary
• notice to the remaining shareholder
• a 30-day completion period
• the purchaser agreeing to be bound by the agreement
• necessary approvals
• cession of claims
• delegation of guarantees or counter-indemnities

These are operational steps, not merely a general promise to offer shares first.

Events affecting a shareholder, and valuation

Offer Events. The deemed-offer provisions cover:

• liquidation, winding up, business rescue or sequestration
• death of a natural-person shareholder
• court-declared mental incapacity and curatorship
• a conviction involving dishonesty
• a material breach not remedied within 15 Business Days after written demand
• undisclosed conflicts or competitive activity, as described in the template

Process after an Offer Event:

1. The affected shareholder must notify the remaining shareholder.
2. Within 20 Business Days after notification, the remaining shareholder may require an offer of the shareholder's interests at Market Value.
3. Once the value is agreed or determined, the offer stays open for acceptance for 30 Business Days.
4. Payment may be a lump sum or 12 equal payments, with interest on the outstanding amount at the rate stated in the agreement.

Valuation:

• The shareholders try to agree a value. If they do not agree within the stated five-day period, a Valuer decides.
• The Valuer may obtain expert advice, must receive written representations from a party, and must make those representations available to the other parties for further comment.
• A dispute about the valuation is first discussed with the other shareholder and the Valuer. If the difference is not resolved, a further route involves an independent practising registered chartered accountant and auditor.
• The Valuer acts as a valuer, not an arbitrator or quasi-arbitrator. The decision is final and binding absent manifest error.
• The assumptions include a willing seller and purchaser, the agreed valuation method, shares free of restrictions and the date of appointment.

Confirm that these assumptions and the selected Valuer are suitable.

Funding, guarantees and defaults

Funding. Future working capital is sourced in this order:

1. free cash flow
2. borrowing
3. proportionate shareholder loans, where stated conditions apply
4. investor or seed-funder assistance, with possible equity participation

Shareholder loans are generally simultaneous, proportionate and unsecured, with interest determined as provided. The agreement also addresses disproportionate loans and repayment priority.

Guarantees. A shareholder may not give a guarantee, suretyship or indemnity to third parties for company obligations that would bind, or purport to bind, shareholders jointly or jointly and severally, without the other shareholders' express prior written consent. This is a control point to discuss before signing any external financing document.

Events of Default include:

• a material breach not remedied within 15 days of written demand
• repeated breaches
• insolvency
• cessation or threatened cessation of business
• an encumberer or office-holder taking possession of substantial assets

If the option is exercised, the defaulting shareholder must deliver transfer and cession documents within the stated period. A board nomination may sign if the defaulting shareholder fails to do so. The agreement also contemplates suspension of participation rights and changes to board representation.

Distributions, confidentiality and notices

Dividend policy. A distribution requires:

• a board resolution authorising it
• a reasonable appearance that the company will satisfy the Solvency and Liquidity Test immediately afterwards
• a board acknowledgement that the test was applied

The distribution must be made within 60 Business Days after the resolution. The clause also describes potential director liability where a distribution contravenes the clause or the Companies Act.

Confidentiality. Use of information connected with the agreement is limited. Exceptions cover:

• information already possessed
• public information not disclosed in breach
• information obtained from an unbound person
• approved disclosures
• legally compelled disclosure

Ensure that staff and advisers who receive information understand the restrictions, and that internal information-handling practices match the signed agreement.

Notices. The stated addresses are chosen as domicilia citandi et executandi, and the agreement sets deemed receipt rules for hand delivery, courier, fax and email. Keep addresses current and retain evidence of notices and demands.

Signing and implementation tips

Before assembly:

• Collect the registered company name, registration number, physical address and authorised signatory details.
• Verify both shareholders' names, identification or registration numbers and addresses.
• Check the shareholding, share class, MOI and approval requirements against the actual transaction.

Valuation preparation:

• Discuss valuation in advance.
• Identify a practical Valuer and confirm what company information can be provided.
• Agree who will monitor the 15-, 20-, 30- and other Business Day periods.
• Keep a central transaction file.

Signing:

• Each party signs in the designated section, with witnesses as shown.
• Confirm the company signatory's authority.
• Keep the signed copy with the company's records.
• Update related corporate records and the MOI where the transaction requires it.

Common mistakes, and why the template helps

Avoid these:

• Assuming signing alone updates the share register or completes a transfer. Follow the required corporate steps.
• Sending a Transfer Notice without the information the clause requires.
• Missing an approval.
• Treating Market Value as an automatic number.
• Using the document for more shareholders or different rights without amendment. Review share classes, funding economics, default consequences and distribution policy.
• Promising a guaranteed outcome. Effect and enforceability depend on the wording, facts, corporate documents and law.

The template brings recurring shareholder issues into one organised document. Definitions, transfer notices, valuation, funding, defaults, confidentiality, domicilia and signature blocks provide a workable base. Complete it accurately, reconcile it with the MOI, and obtain advice where ownership or control may be materially affected.

Contracts4Biz templates are created by experienced commercial attorneys with over 20 years drafting and enforcing agreements under South African law.

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