Shareholders Agreement Template

PLEASE NOTE:

The information below is intended only to be introductory in nature and a guide to what may typically be found in a shareholders agreement. It is not intended to constitute comprehensive advice of a legal or other nature. The drafting of shareholders agreements is complex and advice should be sought in this respect from a properly qualified practitioner or firm as each case should be evaluated and dealt with on its own merits.

The information below was compiled by Cliffe Dekker inc, a leading firm of attorneys specialising in commercial and corpoRate laW. for more information go to WWW.CLIFFEDEKKER.COM

1 SHAREHOLDERS AGREEMENT

1.1 Nature of agreement

1.1.1 A shareholders agreement is an agreement between the holders of shares in a company (the owners of the company) and the company itself. It therefore deals with the relationship of the shareholders amongst themselves, and the relationship of the shareholders with the company. A shareholders agreement would typically deal with, inter alia, the ownership of shares, the disposition and alienation of shares, the management of a company, meetings of shareholders and directors, voting rights at such meetings, the composition of the board of directors and the dividend policy of the company.

1.1.2 A shareholder's agreement is therefore one of the most important documents in the life of a company and such agreements play a pivotal role in the South African empowerment regime, especially when it comes to rating of companies under the BEE scorecard.

1.2 Share capital

1.2.1 A shareholders agreement should deal with the share capital of a company. It must record the number and nature of shares in issue and/or subscribed for and the number and percentage of the issued share capital of the company held or to be held by each shareholder. In relation to a BEE transaction, the shareholders agreement should clearly state who the BEE shareholders are.

1.2.2 The agreement should also set out whether there are different classes of shares in issue (for instance, ordinary shares and preference shares) and the rights attaching to those classes. Caution should be exercised where it is contemplated that a BEE shareholder is to hold a separate class of shares as this may impact on the measurement of the company under the BEE scorecard and may also give rise to an accusation of "fronting".

1.3 Directors

1.3.1 In measuring and quantifying the BEE status of a company under the scorecard, the provisions of a shareholders agreement relating to directors play a role in determination of the management points which will be attributed to a company. These provisions should stipulate the size of the board, state which of the shareholders is entitled to appoint directors (whether there is a percentage threshold for a shareholder to be able to appoint a director or directors) and provide for the removal and replacement of directors.

1.3.2 Naturally, provisions relating to the quorum at board meetings and the voting powers of directors will be important because they determine the direct influence that each director has on the voting relating to a proposed resolution. It is vital that a BEE shareholders agreement states that a certain number of directors (or percentage of the board) must be black persons. Provision can also be made that there will be no quorum at a meeting of directors unless a certain percentage of the directors who are black persons are present.

1.4 Shareholding

1.4.1 A shareholders agreement should stipulate how shareholders' meetings are to be held (notice of meetings etc), what will constitute a quorum, how proxies will be dealt with, what will occur in the event of a deadlock and the like.

1.4.2 Some of the most important provisions of a shareholders agreement from the perspective of a minority shareholder (and a BEE shareholder is often a minority shareholder) are those relating to minority protections. Generally such clauses set out certain reserved matters and stipulate that the directors and shareholders will not be entitled to pass resolutions in respect of such matters without the consent of a specified percentage of the shareholders (so, for instance, if the specified percentage is 80%, then a shareholder holding 25% of the issued share capital of the company will be able to prevent the passing of the resolution in question). Reserved matters are generally limited to material issues such as the purchase or sale of material assets, the borrowing of monies above a certain level, the change of strategic direction of the company and the like.

1.5 Financing

1.5.1 The financing provisions of the shareholders agreement can affect the ownership element of a BEE scorecard. Such provisions deal with the manner in which the company will be funded, and, in particular, the funding to be provided by the shareholders (both immediately and when the company requires further funding in the future).

1.5.2 Issues such as the encumbrance of shares are also relevant. A shareholder might be obliged to encumber, by means of a pledge and cession or otherwise, his shares as security for a loan acquired to finance the company. Encumbered shares might result in the company not being immediately able to obtain credits for the points from its BEE shareholders which it would otherwise be entitled to, and such points may only be attributed to the company as and when the encumbrance is removed or reduced.

1.6 Dividends/Payments to shareholders

1.6.1 The dividend policy of the company should be set out in the shareholders agreement - that is, the agreement should stipulate the circumstances under which a company will or will not declare dividends. It is often provided that a company will not declare dividends if it owes any amount on loan account to its shareholders or if it is indebted to any third party lender.

1.6.2 Caution should be exercised where some shareholders in a company are receiving payments from the company other than through an equitable distribution of dividends or payments to all shareholders (for example, individual shareholders who are also executives of the company might be receiving disproportionate salaries and bonuses, or a particular shareholder may be receiving management or other fees for services rendered to the company). Whilst there may be justification for such payments, the stripping of profits out of a company where the BEE shareholders are not included or equitably dealt with may give rise to accusations of "fronting".

1.7 Management

The management provisions of a shareholders agreement are relevant in determining the management scorecard points of the company. Such provisions should state who is responsible for the day to day management of the company (overall responsibility for the management of the company resides with the board of directors), the identity and appointment of the managing director and senior executives, the manner in which the annual budget of the company is approved, the appointment of the auditors of the company, how the audit of the company will be conducted, the furnishing of management accounts and reports to the board and the shareholders and the like.

1.8 Transfer of shares

1.8.1 A shareholders agreement usually provides for rights of first refusal (otherwise known as pre-emptive rights) in favour of the remaining shareholders of a company in the event that a shareholder wishes to dispose of his shares. Generally such rights provide that, if a shareholder wishes to dispose of his shares, he shall first offer the shares to the remaining shareholders (pro rata) at the price which he has been offered for them from an outsider. The selling shareholder should not be entitled to sell to the outsider at a lower price or on better terms than was offered to the remaining shareholders.

1.8.2 From a BEE perspective, the identity of the transferee of shares is very important. For the purposes of BEE, these provisions can go further and state that, if a shareholder who is a black person wishes to dispose of his shares, he may only offer them to the remaining shareholders who are also black persons, and can only sell to a third party which is a black person. This is an attempt to ensure that the BEE credentials of a company are not affected by the transfer of shares. In the case of a purchaser who is a company or other juristic person, such provisions should also state that a shareholder can only sell to a company with a requisite BEE compliance level.

1.8.3 There are other ways in which a shareholders agreement can provide for a company to retain its BEE rating where a BEE shareholder leaves, and these would need to be explored on a case-by-case basis.

1.9 Deemed offer

The deemed offer (or forced sale) provisions of a shareholders agreement play an important role. For instance, the shareholders agreement can state that, if the BEE level of a shareholder is reduced below a certain level, that shareholder will be deemed to have offered to sell its shares to the other shareholders on the happening of the event which led to the reduction of its BEE level. The deeming provisions can also stipulate other trigger events the happening of which will give rise to a deemed offer (for example insolvency, change of control, the resignation of an executive who is also a shareholder). These provisions should also state how the purchase price will be determined in the event of a deemed offer arising (for instance, the fair market value of the shares, or a percentage thereof).

1.10 Come-along / Tag-along

Shareholders agreements often include clauses which provide that under certain specified circumstances -

1.10.1 where a majority shareholder or shareholders sell their shares, the minority shareholder/s can require that they also be bought out on the same terms (tag-along); and

1.10.2 where majority shareholders wish to sell their shares to a third party which wishes to purchase 100% of the issued share capital of the company, the majority shareholders can require that the minority shareholders also sell their shares on the same terms (come-along).

1.11 BEE Warranties

BEE shareholders are often required to warrant that they are black persons or they have a certain BEE accreditation level and will retain that level. Where the BEE shareholder is not an individual, it may be necessary to bind other parties (for instance, shareholders of the BEE shareholder) to the relevant provisions of the shareholders agreement to give effect to this undertaking.

1.12 Other Provisions

Shareholders agreements contain various other provisions, including provisions relating to breaches of the agreement and the remedies for such breaches (it should not be possible to cancel a shareholders agreement for breach) and dispute resolution.

1.13 Conclusion

The above is obviously a brief summary of some of the more important principles which might be set out in a shareholders agreement. It should be kept in mind that there are a myriad ways in which a shareholders agreement can be structured and that what is set out above provides a basic starting point for what can be extremely sophisticated agreements.