Shareholder Agreements in South Africa: 7 Clauses Every SME Must Include

Starting a business in South Africa is an exhilarating journey. But as any seasoned entrepreneur will tell you, the "honeymoon phase" between business partners doesn’t last forever. Whether it’s a disagreement over direction, a partner wanting to leave, or an unexpected life event, your business needs a safety net.

That safety net is a Shareholder Agreement.

While the Companies Act provides a basic framework, it is often too general for the specific needs of a Small to Medium Enterprise (SME). A professionally drafted Shareholder Agreement is the "pre-nuptial" for your business, it defines the rules of engagement before things get complicated.

Here are the 7 essential clauses every South African SME must include to protect their investment and their future.

1. The "Deemed Offer" (Exit Strategy)

In a small business, you don’t just want anyone becoming your partner. If a shareholder wants to leave, they shouldn't be allowed to sell their shares to a stranger without your consent.

• How it works: This clause ensures that if a partner wants out, they must first offer their shares to the remaining shareholders before looking for outside buyers. This keeps control within the original founding group.

  
  

2. Forced Sales (The "Bad Leaver" Clause)

What happens if a partner is caught defrauding the company, or simply stops showing up to work? You shouldn't be stuck sharing profits with someone who is harming the business.

• Why you need it: A "Bad Leaver" clause allows the company to force a shareholder to sell their shares (often at a discounted price) if they are dismissed for misconduct or breach the agreement.

3. "Tag-Along" and "Drag-Along" Rights

These clauses protect both minority and majority shareholders during a big sale.

• Tag-Along: If a majority shareholder sells their stake, the minority shareholder has the right to "tag along" and sell their shares on the same terms. This prevents them from being left behind with a new, unknown majority owner.

• Drag-Along: If a majority of shareholders want to sell the entire company to a buyer, they can "drag" the minority shareholders into the deal. This ensures a single stubborn person can't block a life-changing sale of the business.

4. Funding and Cash Calls

SMEs often run into cash flow issues. If the business needs an urgent injection of R500,000 to survive, how is that money raised?

• The Clause: This section outlines whether shareholders are obligated to contribute more money, how much, and what happens if one partner can’t pay. Usually, the partner who can’t contribute sees their share percentage "diluted" (reduced).

5. Deadlock Resolution

What happens when there are two 50/50 partners and they completely disagree on a major decision? Without a deadlock clause, the company can grind to a halt (and eventually fail).

• The Solution: You can include a "Mediation" requirement or more creative solutions like a "Texas Shoot-out" or "Multi-step" resolution to ensure the business keeps moving forward even when partners disagree.

6. Restraint of Trade

Imagine your business partner leaves today and opens a competing shop across the street tomorrow, using your client list.

• The Protection: In South Africa, a Restraint of Trade must be "reasonable" to be enforceable. By including this in your Shareholder Agreement, you prevent departing partners from competing with the business or poaching staff and clients for a specific period within a specific area.

7. Valuation Methodology

The biggest fights in South African business usually involve one question: "What is this company worth?"

• The Fix: Don’t wait until someone is leaving to argue about the price. Include a clause that dictates exactly how the shares will be valued (e.g., by the company auditor or a specific financial formula). This removes the emotion and replaced it with math.

Why "Standard Templates" Are Dangerous

Many South African entrepreneurs make the mistake of downloading a generic template from the internet. However, your Shareholder Agreement must align with your Memorandum of Incorporation (MOI). If the two documents contradict each other, the Companies Act says the MOI usually wins, which could render your agreement useless.

Conclusion: Build on Solid Ground

A Shareholder Agreement isn't about a lack of trust; it’s about clarity. When everyone knows the rules, you can stop worrying about "what if" and start focusing on "what’s next."

Need a watertight agreement tailored to South African law? Don't leave your legacy to chance. Contact Legal Drafters today for professional, precise, and affordable contract drafting.