Shareholders’ agreements are a common feature of many South African companies. In the latter the shareholders typically set out rules and provisions which govern the management of the company. The provisions which one may encounter in a shareholders’ agreement deal with the manner of appointment of the directors, the rights of the shareholders to be offered, in priority to those who are not shareholders, the shares which the other shareholders wish to sell, higher thresholds than those required in terms of the Companies Act for a certain matter and administrative matters such as the level of dividends which must be paid or withheld, the operation of the bank account, appointment of the auditors, etc. This is not an exhaustive list and the range of provisions encountered varies from case to case and company to company.

Historically, most, if not all, shareholders’ have provided in their agreements that, if a conflict arose between the provisions of the shareholders’ agreement and those of the articles of association of the company, the provisions of the shareholders’ agreement would prevail. It would indeed be surprising to come across a shareholders’ agreement that did not contain such a provision.

The Companies Act has recently been re-written. Why is that important to you as a shareholder? While the Companies Act permits shareholders’ to enter into any agreement with one another concerning any matter relating to the company” it provides in addition that –

any such agreement must be consistent with [the Companies] Act and the company’s Memorandum of Incorporation, and any provision of such an agreement that is inconsistent with [the Companies] Act or the company’s Memorandum of Incorporation is void to the extent of the inconsistency. (our emphasis)

If you’re thinking that you ought to have been given warning of the drastic consequences of inconsistent provisions in your shareholders’ agreements, or at least some time to put your affairs in order, you would be right. There’s a schedule to the Companies Act which deals with ‘transitional arrangements’, that is, provisions which are to apply for an interim period, to permit shareholders to ensure that their affairs are put in order. Where, before 1 May 2011, the shareholders of a company entered into a shareholders’ agreement (or something similar to that), that agreement continues to have the same force and effect for a period of two years thereafter, despite the provision quoted above (and which voids provisions in that agreement which are inconsistent with the Companies Act or the Memorandum of Incorporation), or until changed by the shareholders. After the expiration of the two year period the shareholders’ agreement remains valid and in effect but only in so far as the agreement is consistent with the Companies Act and the company’s Memorandum of Incorporation.

If, therefore, your shareholders’ agreement contains a provision that overrides your company’s Memorandum of Incorporation you have some time to make sure it is also consistent with your company’s Memorandum of Incorporation and with the provisions of the Companies Act.

Make sure you make the most of the time you have available and get in touch with us to discuss how we can help you align your shareholders’ agreement with both the company’s Memorandum of Incorporation and the Companies Act. We will review your current documents and let you know to what extent they are not consistent and what can be done about that.