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CaseLaw
CaseLaw, Attorney
Category: South Africa Law
Satisfied Customers: 1558
Experience:  BCom; LLB; Masters in Law
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How do you deal with a shareholder breaching an agreement by

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Hi, how do you deal with a shareholder breaching an agreement by pulling out when there's no provision for that in the agreement?
JA: What state are you in? It matters because laws vary by location.
Customer: south africa
JA: Has anything been filed or reported?
Customer: there's a shareholders agreement and we needed to be making cipc changes for issuing of shares and formal appointment of directors. one shareholder has written to the rest saying they are pulling out, then the shareholder representative has now resigned as director - he had been the only director so far since he bought the shelf company
JA: Anything else you want the lawyer to know before I connect you?
Customer: what is recourse for the new directors?

Hi there and thank you for your question,

I will try to assist you with your legal question but please feel free to ask as many follow up questions in order to clarify your initial question. If you have a new question, you must please open a new thread.

The remaining shareholders do not need to put up with this. What they need to do is to read the companies act on how to go about calling a shareholders' meeting, and how to pass resolutions to appoint directors, etc. At the shareholders' meeting you would vote to pass resolutions. That's how the company should be run.

Perhaps if the one shareholder wishes to pull out of the company, the other shareholders should simply offer to buy his shares from him? Then you would do a simple sale of shares agreement.

You must also remember that directors are different to shareholders. Directors are appointed to operate the company on a day to day basis, while shareholders are actually the owners of the company.

If my answer hasn't provided you with enough clarity regarding your initial question, please send me a REPLY with follow up questions so that I can continue to assist you in this same thread for as long as you need. Let me know if you need more advice - dont just rate my answer as "bad".

If my are HAPPY with my answer then please click one of the STAR ratings or the SMILEY FACES to rate my answer!

Good luck and best regards,

CaseLaw

Customer: replied 7 months ago.
This company is a start up and just recently got awarded a loan facility of R50million to start manufacturing company. We were busy dealing with loan conditions when the one shareholder decided inter alia he doesn't like the personal surety clauses since and wants to pull out his trust as a shareholder. The shareholder on numerous occasions offered his shares back to the company but none of the other shareholders wanted his shares because we wanted this guy to be CEO for 18months since we had all rallied around his business idea so we wanted his skin in the game. Now he wants the rest of us to be exposed while he runs the company with no exposure as a CEO only. Now he also resigned as director and facilitated the overdue appointment of the 3 of us as directors ..meaning he is running away from the deal..our funder does not know this yet they are expecting some info from us to conclude contract docs. We feel this guy has breached shareholders agreement because there's no provision for him to offer shares back..he needs to offers to sell but nobody wants the shares.
Customer: replied 7 months ago.
We passed a majority shareholder decision declaring a breach and saying we will seek legal advice as this might jeopardize the company loan offer because the funder is unlikely to agree to his surety condition amendment
Customer: replied 7 months ago.
Even if the funder were to agree..it would be a problem because WE want his skin in the game...but now he has resigned as director too so he can't be CEO either and he is basically exiting the deal it would seem..
Customer: replied 7 months ago.
The resignation happened yesterday..he facilitated our appointment as new directors finally yesterday ..appointment done as a consequence of shareholder agreement..share certificates hadn't been issued yet because he consistently said this will be done when we've agreed with loan conditions when in fact shareholder agreement says share certificates would be issued on approval of finance..we've been disagreeing on this for a while now..but yesterday, after his resignation he said he would also facilitate share certificate issue for us remaining shareholders
Customer: replied 7 months ago.
Let me also pull race card..he's white and is 20% whilst we're black and collectively have 80% and we applied for black industrialist grant but were rejected and told to resubmit inter alia ownership docs..we think they saw that at the time of application he was the only director and there were no share certificates proving our inclusion..that's why we started insisting on director changes and share certificates issue and he wanted to keep all this for when we are done with contracting with funder

First, there does not need to be any provision in your shareholders agreement which deals with whether or not this shareholder is entitled to offer his shares back to the company. It is done in accordance with the companies act. Any shareholder may, at any time, offer his shares for sale to the company or to other shareholders. There is NOTHING that you can do to stop the offer being made. If you want to keep him as a shareholder, then you must just NOT accept the offer.

But from what you're saying, this guy doesn't want his trust to be a shareholder in the company anymore. Essentially he is happy to continue in the company, but only as an "employee" CEO. i.e. he won't have any skin in the game.

It sounds to me as if you and your co-shareholders can't agree on the way forwards for this company.

You need to realise that it will be nearly impossible to move this company forwards with a shareholder (like this trust) who does not want to be involved in the company. He will make it difficult to implement most decisions so as to frustrate you and the other shareholders until you get to a point in time when you just want this guy out. And in reality, there is nothing that you can really do about it.

The old saying goes "you can lead a horse to water, but you can't make it drink"

Why are you intent on forcing this shareholder to be a shareholder if this is the amount of hassles that he's already giving you? Would it not be easier to accept his leaving the company and continue without him as a shareholder, but as a CEO/director instead?

Why do you need this guy causing issues in your company? My advice is to get rid of him as a shareholder and move forwards.

Customer: replied 7 months ago.
nobody wants his shares so we have not accepted the shares back into the company. He has the industry skill more than us and he has the networks and the funder has made it clear they will not fund if he pulls out from operations, unless we can replace the skill. We also think he could be careless as a CEO if he knows his balance sheet is not exposed like ours. Furthermore, our collateral we were going to get from a bank would have been given to the company on the strength of his and one other shareholder's balance sheet so him leaving would also mean we will struggle to raise collateral.

Legally you can apply to the High Court to force this shareholder to comply with the shareholders' agreement. If the shareholders' agreement requires that ALL shareholders sign personal sureties for the company, then he must do that. If he won't, then you will need to get the High Court to force him to do so. The main issue is that this could take between 12 and 36 months to resolve at Court - during which time you would certainly lose the funding or the job. Legally therefore you could eventually force him to comply, but he could delay the process to frustrate you. That's why it is ALWAYS best to get rid of a shareholder who doesn't want to be a shareholder anymore. Also, if you apply to Court he could apply to have the company liquidated on the basis that the shareholders can't come to an agreement with each other. Then you'd have nothing.

You've got to focus your fight for the moment. What is the one thing that you want his shareholder to do now? Is it to sign personal surety? If so, then you need to approach the High Court for that relief.

The one thing that you can't force him to do is to be a director of the company. As a shareholder I'm sure that he has the RIGHT to appoint himself as a director, but if he refuses, then there is NOTHING that you can do to force him to be a director/CEO.

You also run the MAJOR risk that this shareholder will contact your funders / clients directly and advise them of this dispute, and that will be enough for the funders / clients to pull out of the company! Then you would be left with nothing more than a shell.

My advice to you is to pick your fight carefully. Read your shareholders agreement, and find an obligation which he is supposed to perform (which he hasn't) and apply to court to force him to comply.

Hi there again,

I see that you've read my answer and I hope that you understood the answer and that it was useful? If you have a further question please ask it, or if you need clarity on the answer please let me know.

If you're happy that I've answered your question, please leave positive feedback for me.

Regards

CaseLaw

Hello. Are you still there? Please can you rate my answers as set out above?

Customer: replied 7 months ago.
Thanks for the answer it was very useful. Is there a guide to rate your answer?
Hi there,
There should be a smily face system or a star rating which you can click on.
Otherwise, you can also reply to confirm that you're happy with my advice!
Thanks so much!
CaseLaw and 2 other South Africa Law Specialists are ready to help you

Hi there,

Thanks so much for the positive rating. Please remember that I'm always here to assist in the future. You can request me here: http://www.justanswer.com/law/expert-caselaw/

If you are looking for a good Company Law attorney based in South Africa then click on this link: Company Law attorney

CaseLaw