When establishing or exiting a private company in South Africa, shareholders often focus on profit forecasts and ownership percentages. However, one of the most critical and often overlooked considerations is the exit strategy. What happens if you want to sell your shares, or if another shareholder decides to sell?
Two contractual tools, “come along” rights and “tag along” rights, are essential to address these scenarios. These rights do not arise automatically under the Companies Act 71 of 2008 (“the Act”), and if they are not expressly set out in writing, they will not be legally enforceable.
Understanding the Difference
Tag along rights protect minority shareholders. If a majority shareholder negotiates a sale of their shares to an outside buyer, tag along rights give minority shareholders the option to sell their own shares to the same purchaser, on identical terms. This prevents them from being left with a new majority owner who might not act in their best interests. For example, if you own 30% and the 70% shareholder sells, you can “tag along” and exit at the same price per share. Without such a right, you may be forced to stay with an owner you never agreed to.
Come along rights, by contrast, serve majority shareholders. They allow the majority to compel minority shareholders to join in a sale when the majority finds a buyer for 100% of the company. This avoids situations where a small shareholder can block a full acquisition. Like tag along rights, come along rights must be recorded in a binding agreement to be enforceable commonly within the Shareholders’ Agreement (SHA) and/or the Memorandum of Incorporation (MOI).
Where to Record These Rights
The SHA governs relationships between shareholders, while the MOI sets the company’s internal rules and its interactions with third parties. Under section 15(7) of the Act, the MOI takes precedence over the SHA if there is a conflict. For maximum protection, key provisions should appear in both documents. If you want the rights to apply to future shareholders or bind third parties, they must be in the MOI.
Addressing Deadlock
Deadlocks, particularly in 50/50 ownership structures, can paralyse a company when shareholders or directors cannot agree on major decisions such as selling the business, raising capital, or changing its strategic direction.
Possible solutions that can be built into the MOI or SHA include:
- Appointment of a neutral mediator or arbitrator;
- Casting vote provisions;
- Buy-sell or “shotgun” clauses;
- Forced sale mechanisms allowing one party to buy out the other.
Without these mechanisms, parties may have to rely on statutory remedies or the courts, which can be costly and unpredictable.
Statutory Remedies
Under section 163 of the Act, a shareholder can apply to court if they believe they are being oppressed, unfairly prejudiced, or that their interests are being disregarded. The court can order a buy-out, change the governance structure, or even appoint new directors.
In severe breakdowns, section 81(1)(d)(iii) allows a shareholder to apply for the company’s winding-up on the basis that it is just and equitable. This is a last resort, but sometimes the only viable option. Common law duties of good faith, fiduciary obligations, and contractual principles remain enforceable, and directors or shareholders acting in bad faith may face personal liability.
Key Lessons for Shareholders
If you are starting a company, take time to draft a tailored MOI and SHA that go beyond CIPC compliance templates. These should address share transfer restrictions, pre-emptive rights, voting requirements, dividend policies, dispute resolution processes, and exit strategies.
If you are exiting the company, check whether come along or tag along rights exist and understand their terms. For minorities, tag along rights protect you from being left behind. For majorities, come along rights ensure smooth exit opportunities in a full sale.
Why This Matters
Shareholder disputes are among the most disruptive and expensive problems facing small and medium businesses in South Africa, but they are also among the easiest to prevent. Clear, well-drafted, and enforceable agreements can resolve many issues before they escalate into litigation.
Disclaimer: This content is for general information only and does not constitute legal advice. Consult a qualified attorney for advice specific to your circumstances.
If you are forming a company or considering selling your shares, our firm can assist with structuring shareholder arrangements, drafting agreements, and representing you in disputes. We offer practical, strategic solutions to protect your rights and investments.
