Dear Clients

A shareholder’s rights of pre-emption, or pre-emptive rights as they are more commonly referred, in essence refers to a shareholders right of first refusal to be offered another shareholders shares in the event that such shareholder should wish to dispose of his / her shares. By way of example, if a shareholder should wish to sell his / her shares, the remaining shareholders would have a pre-emptive right to be offered the selling shareholders shares pro rata to their shareholding in the company. If none of the shareholders follow their pre-emptive rights and accept the offer to purchase the selling shareholders shares, the selling shareholder shall then have the right to sell their shares to a third party at a price and on terms no more favorable than those offered to the remaining shareholders.

Following the enactment of the Companies Act 71 of 2008 many private companies adopted new Memorandums of Incorporation (MOI) and shareholders agreements so as to ensure that their MOI’s and / or shareholders agreements were not in conflict with the provisions of Companies Act 71 of 2008. In this regard companies either adopted the CIPC standard form MOI’s or alternatively companies adopted customized MOI’s. One of the many deficiencies of not only the CIPC standard form MOI but also many customized MOI’s and accompanying shareholders agreements is that they do not adequately deal with the pre-emptive rights of shareholders, that being the shareholders pre-emptive right to be offered a shareholders shares should they wish to dispose of their shareholding for any reason. This issue is further compounded by the fact that unlike the now repealed Companies Act of 1976, the new Companies Act 71 of 2008 only deals with the pre-emptive rights of shareholders when the Company issues new shares, there are no provisions in the Companies Act 71 of 2008 governing the pre-emptive rights of shareholders in respect of the disposal of a shareholders shares. The result is that many private companies either have no provisions in their MOI’s and / or shareholders agreements dealing with pre-emptive rights or have very basic pre-emptive rights provisions in their MOI’s or shareholders agreements which are wholly inadequate in a number of respects, including:

  • Insufficient detail with regard to the procedure that should be followed in respect of the offer of shares to existing shareholders should a shareholder wish to sell their shares;
  • No mechanism to determine the purchase price for the shares;
  • No provisions dealing with the death or insolvency of a shareholder and the pre-emptive rights of shareholders to be offered their shares:
  • No provisions dealing with the change of control of a shareholder and whether this should trigger an offer of their shares to the remaining shareholders.

With inadequate provision in a company’s MOI or shareholders agreement dealing with the above matters it is not difficult to imagine how this could lead to shareholder disputes and ultimately litigation.

In light of the above it is essential that private companies review their MOI’s and shareholders agreements to ensure that the pre-emptive rights of shareholders are clearly and comprehensively dealt with. For a review and assessment of your company MOI or shareholders agreement please don’t hesitate to contact .

Kind regards
Nicholas Britz

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