Commercial Law: Important Aspects to Consider When Starting a Business

In this article I will highlight the importance of having a shareholders agreement tailored to your business.

So you and your partners have taken the leap and started a new business. Well done! You probably have also spent many a late-night planning on how to manufacture your product or deliver your service. A shareholder’s agreement is most likely the last thing on your mind, so why should you have one?

There are many reasons why a shareholder’s agreement is imperative, but I will highlight three reasons which you should consider:

  1. Dispute Resolution

How do you and your partners deal with conflicts or disagreements which may arise relating to the scaling of the business, marketing, distribution of products and general opportunities to name but a few? Ineffective handing of conflict will undoubtedly hamper potential business growth if there are no predetermined dispute resolution mechanisms. A well drafted shareholder’s agreement makes provision for an expedited dispute resolution mechanism which will help you resolve disputes faster, leaving you to go on and do what you do best, growing your business.

  1. Shareholder Protection

Are you a minority or majority shareholder in the company? Either way, you will need protection. A well drafted shareholder’s agreement should include “tag-along” and “drag along” provisions. A “tag-along” provision protects a minority shareholder in that where a majority shareholder wishes to “exit” the company, the minority shareholder can insist that the buyer also buys his shares. A “drag-along” provision provides protection to a majority shareholder to the extent that it compels the minority shareholder to sell his shares if the buyer wants to buy all of the shares in the company.

  1. Exit

What’s your exit strategy, or what is the procedure should any of your partners wish to leave the company? I know the thought of you or anyone leaving your business has probably not crossed your mind. I get it. However, having an exit strategy or planning therefore is essential. Things happen and people leave. The last thing you need is uncertainty as to how the exit process will unfold. A well drafted shareholder’s agreement must include provisions relating to pre-emptive rights and a valuation process. Pre-emptive rights grant existing shareholders a right of first refusal to purchase the shares of the exiting shareholder. A valuation of shares provision determines the mechanism or process of valuing the shares. Dealing with this without a pre-determined process is in our experience, problematic.

Always remember that no matter how well the company’s shareholders agreement is drafted, its provisions must always correlate with your company’s Memorandum of Incorporation.

Does this article leave you worried? Don’t be. We here at DKVG Incorporated understand the ebbs and flows of starting a new business and will be able to assist you.

For any assistance or guidance contact Matthew Pillay at mpillay.co.za or Jacques Odendaal at jodendaal@dkvg.co.za.

This article is for general information purposes and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us At DKVG Attorneys for specific and detailed advice.