Where There's a Will There's a Way

Call it the "prenup" for business relationships — shareholders' agreements are essential tools to mitigate shareholder disputes and promote the smooth functioning of companies.

A shareholders' agreement, while not legally mandated, is an instrument we regard as indispensable in any company with two or more shareholders. It regulates the relationship between the shareholders and the company and can (and should) be tailored to the specific commercial and relational dynamics between the parties.

That said, there are certain clauses which, even if not included in every shareholders' agreement, should never be overlooked. These include:

Funding provisions

Companies need capital. Practically though, who is expected to provide it, and on what terms?

Shareholders' agreements should comprehensively address funding and deal with key issues such as whether shareholders are obliged to fund, the consequences of some shareholders funding and others failing to do so and whether funding shareholders should earn preferential interest or be entitled to subscribe for additional shares and dilute non-funding shareholders.

These are often contentious points, particularly where shareholders have different financial capacities or appetites for risk. For example, a well-capitalised shareholder A may want the right to fund the company through further share subscriptions, thereby diluting a less liquid shareholder B. This is unlikely to be acceptable to B without appropriate safeguards or compromises, and the parties may need to negotiate a middle ground (for example, capped dilution, staged funding obligations, or alternative solutions).

It is far preferable to address these issues upfront rather than at a time when the company is under financial pressure. Delays in securing funding, caused by shareholder disagreements, can cripple a business.

A well-drafted shareholders' agreement should anticipate these scenarios and strike a fair balance between competing shareholder interests, while ensuring that the company can in fact access the capital it needs.

Reserved matters

While the day-to-day management of the company generally vests in the board, there are certain strategic decisions, beyond those required by the Companies Act, that shareholders may wish to reserve for themselves.

By way of example, decisions pertaining to the borrowing or lending of money by the company, the granting of security by the company or the encumbering of any of the company's assets, the conclusion, amendment or termination of material agreements or the incurring of significant capital expenditure, are often matters shareholders prefer to retain control over.

The next question then is, what level of shareholder approval should be required? This will depend on the shareholding composition and commercial dynamics between the parties.

Reserved matters will not be necessary in every scenario. For instance, they may be less critical where the board and the shareholders are effectively the same people and no change in that alignment is anticipated. Nonetheless, inclusion of reserved matters should always be considered, as they materially affect governance and control.

Pre-emptive rights

Trouble in paradise… you or your co-shareholder want out. What are the rules in this regard?

Pre-emptive rights provisions are crucial, as they regulate the terms on which a shareholder may dispose of its shares.

Typically (although shareholders are free to agree differently), these clauses provide that a shareholder wishing to sell its shares must first offer such shares to the existing shareholders (usually pro rata to their current shareholding). Only if the existing shareholders decline such offer may the seller approach a 3rd party, and then only on terms no more favourable than those offered internally.

Important aspects to consider include the time period within which the existing shareholders must accept or reject an offer. This requires balancing commercial expediency for the seller against the practical reality that existing shareholders often need time to raise funding. In a similar vein, due consideration must be given to the window within which the seller may sell to a 3rd party before the shares must again be re-offered to the existing shareholders.

A further consideration is whether the existing shareholders should have a right to veto or approve the proposed 3rd party purchaser. This requires weighing up the seller's legitimate interest in being able to exit, against the existing shareholders' interest in not being forced into partnership with an undesirable new co-shareholder.

These clauses are often coupled with call and put options, which allow shareholders to require another shareholder to either sell or buy shares at a pre-agreed or determinable price. They may also include come-along and tag-along rights, which allow shareholders either to compel others to join a sale to a third party or to participate in a sale initiated by another shareholder.

These mechanisms collectively shape the exit environment and should be drafted with care.

Shareholders' agreements are inherently complex instruments. They require thoughtful negotiation and precise drafting to balance diverging commercial interests while preserving the company's ability to operate effectively.

A sale of business agreement invariably deals with the purchase price, assets and liabilities being transferred, and the method of payment. There are, however, matters sometimes overlooked which are crucial to include in the agreement to ensure both compliance with statutory obligations and protection for the parties. Bear these in mind:

VAT Zero Rating

The sale of a business qualifies as a "supply" as contemplated in the VAT Act. In terms of section 11 of the VAT Act, such supply may be subject to a VAT rate of 0%, provided it meets the following requirements:

• Both parties must be registered as VAT vendors at the time of supply;
• Both parties must agree in writing that the business is disposed of as a going concern. The subject matter of the sale must be an income-earning business (or part of a business), which is transferred as a functional unit to the purchaser and capable of separate operation;
• Both the seller and purchaser must agree in writing that the business is an income-earning activity on the date of transfer;
• All of the assets necessary for the business to continue its income earning activity after the date of transfer must be disposed of;
• The sale of business agreement specifically stipulates that the purchase price includes VAT at 0%.

Should the parties to a sale of business agreement wish to benefit from the zero rating, it is vital that the agreement complies with each of these aspects.

Section 34 of the Insolvency Act

This section requires a "trader" (as defined in the Insolvency Act) to publish statutory notices that it is transferring its business. The object of such notices is to protect the seller's creditors by alerting them to the sale and giving them the opportunity to institute action against the seller before the transfer is effected.

The timing requirements for such notices are very specific and require careful planning from a transactional timeline perspective. The timing of publication often creates a complication where parties are keen to have the transfer and payment occur by specific dates. As such, parties sometimes choose to dispense with publication. This needs to be carefully considered. Failure to publish exposes the purchaser for a period of 6 months after the transfer within which it is possible for the seller's creditors to pursue the assets of the transferred business in the hands of the purchaser to secure payment of their claims against the seller. There is also the possibility of the transaction being treated as void after this period, should the seller go into liquidation. If a purchaser does agree to dispense with publication under section 34, the sale agreement needs to incorporate protections should any creditors of the seller seek to attach the assets acquired by the purchaser.

Section 197 of the Labour Relations Act (LRA)

Section 197 of the LRA provides that, where a business is transferred as a going concern, the employees working in such business automatically transfer with the business and become employees of the new owner. Accordingly, the purchaser inherits obligations that the seller, as old employer, had towards such employees, including unpaid salaries, accrued leave and unpaid bonuses, and other benefits in terms of their existing employment contracts.

Whilst the transfer of the existing contracts of employment will occur automatically in terms of section 197(7), section 197(6) permits the parties to agree, in the alternative, to negotiate new terms and conditions on which the transfer will occur or even that no transfer will occur. Such an agreement must be concluded between the old employer, new employer and any party that would need to be consulted had a retrenchment procedure occurred. Such alternative terms and conditions must on the whole not be less favourable to the employees than those on which they were employed in terms of the existing contract of employment.

Since section 197 renders the old and new employer jointly and severally liable in respect of the employee obligations, it is of fundamental importance that the seller and purchaser contractually agree their respective liabilities in this regard.

Warranties

Even the most thorough due diligence investigation may fail to uncover issues which can result in future liability or give rise to losses for the purchaser of a business. As such the agreement must include warranties in favour of the purchaser, effectively guaranteeing that the facts stipulated in the warranties are correct. Warranties serve to mitigate risk for the purchaser by providing a financial recovery mechanism if a warranty turns out to be untrue.

The mechanism for compensating the purchaser for breach of a warranty may be compensation in the form of damages or an adjustment to the purchase price.

The seller may in turn protect itself against warranty claims by making clear disclosure against the agreed warranties. The agreement will in such instance provide that the scope of the relevant warranty is limited by the disclosure made.

The seller may further protect itself by including a clause which specifies limits on its liability for breach of a warranty. Such a clause may limit the quantum a purchaser may recover or set a time period within which a purchaser must claim to recover.

The dynamic nature of the South African labour market and relevant legislation can prove to be a minefield for many companies. Having a dedicated legal partner with diverse and extensive experience of labour law in South Africa, offers peace of mind for our clients in what can be a complex and contentious area.

Our comprehensive range of labour law services across the full employment suite is designed to consider the needs of both employers and employees. In addition to problem resolution, we offer an industrial counselling service to provide problem avoidance through education, performance enhancement and improving company morale by identifying and addressing grievances.

As we are well integrated with our other practice areas such as litigation, M&A, and others, our clients are able to rely on the expertise found across all legal departments at Fluxmans and therefore enjoy a seamless experience in our holistic management of all labour and human resource matters.

Intellectual property is the foundation of franchising. The basis of a successful franchise lies in the fact that the franchisor has developed distinctive products and services, unique methods of marketing and presenting them and a reputation connected to those products and services, from which other people want to benefit. Much of the value of the franchisor's intellectual property lies precisely in the fact that access to it is restricted to the franchisor and its network of franchisees; entrepreneurs wanting to benefit from it must sign up as franchisees. The franchisor generates its income from the fees paid by franchisees.

It is therefore entirely understandable that franchisors would want to protect their intellectual property from unauthorised use by, amongst others, former franchisees who, having been exposed to and trained in the franchisor's valuable business methods and trade secrets, look to exploit them for their own benefit after the franchise agreement has ended.

However, through a long line of decided High Court cases, this has proved extremely challenging, with the courts in the vast majority of cases having refused to enforce the restraint. The most recent example, A Plus Students (Pty) Ltd v Amanda Herbst, in which judgment was handed down on 26 February 2026, is no exception, and demonstrates the difficulties franchisors face.

The restraints that the franchisor was attempting to enforce were contained in two clauses, reading as follows:

Upon the termination of this agreement, the Franchisee will not gain any monetary value from advising or teaching math calculation methods by means of the system of operating the product of education of Japanese Soroban (Abacus) Mental Arithmetic (the 'Japanese Model'), including the use of abacus and mental computation methods to teach the skill of fast and accurate math calculation, for a period of thirty six (36) months after the termination of this agreement, and for the Territory of South Africa and SADC countries as set out in 1.14.

The franchisee hereto undertakes and agree, that it will not participate, own, manage, either by agency, representation or family connections, compete with the franchisor in any manner or form relating to a max educational entity irrespective of the mythology [sic] or any such like, pertaining to the training of individuals.

The principles on which the courts approach cases in which they are asked to enforce restraints are well settled and do not need to be revisited in detail, save to put in context the principal lessons from the judgment for franchisors and their legal advisers.

In summary, the principles on which the enforceability of a restraint will be assessed are:

• Does a party have an interest that deserves protection after termination of the agreement?
• If so, is that interest threatened by the other party?
• In that case, does that interest outweigh the other party's interest not to be economically inactive or unproductive?
• Does public policy, independently of the relationship between the parties, require the restraint to be upheld?
• Is the restraint necessary to protect the applicant's interests, or does it go further than is necessary?

Analysing the evidence, the Court noted the following flaws in the case the franchisor had presented:

• The franchisor had alleged that the former franchisee was using or exploiting the franchisor's confidential information and trade secrets in the new business in which she was involved. However, the franchisor had not given any details of what the confidential information and trade secrets comprised. It has also not given any details of how and if the former franchisee's business was using or exploiting its confidential information;
• The restraint clause prohibited the former franchisee from competing with the franchisor. The court pointed the often-overlooked point that, in general, a franchisor does not itself carry on the business carried on by its franchisees, but instead grants franchisees the right to carry on that business, and benefits commercially from granting that right. The business the former franchisee was carrying on may have competed with the franchisor's franchisees, but not with the franchisor itself;
• The geographical area covered by the restraint included 16 countries with a combined area of over 11 million km² and a combined population of over 300 million people. The franchisor had not provided any evidence to show that its protectable interests extended throughout the area and had not even suggested a smaller area over which its interests did extend.

The judgment in this case is instructive for franchisors and their legal advisers, when drafting restraint clauses in franchise agreements and when enforcing them in court. The following points should be noted —

• Because the court has to balance the interests of both parties, it will interpret the restraint strictly and will not extend it to apply to any situation that does not fit the literal interpretation of the words used;
• Franchisors must be careful to consider what situations the restraint is meant to cover and drafters to ensure that the literal meaning of the words covers those situations but goes no further than is necessary to cover them. This would relate to the restricted activities, the period for which the restraint applies and the area in which it operates;
• Because most proceedings to enforce restraints are brought by way of applications, the papers filed on behalf of the franchisor must state explicitly: 1) the terms of the restraint; 2) the confidential information or other interests referred to in the restraint that the franchisor is trying to protect; 3) the former franchisee's conduct and how it infringes the restraint; and 4) why the restraint is necessary, and goes no further than necessary, to protect the franchisor's interest.

The Consumer Protection Act (CPA) contains extensive regulations prescribing terms and information that must be included in franchise agreements. However, although it had been raised in several cases that a franchise agreement that the parties had concluded omitted some of the prescribed details, in none of these cases had the courts declared outright that these omissions rendered the agreements void, or even that it afforded either of the parties the option of cancelling the agreement. For example, in Steynberg v Tammy Taylor Nails Franchising No 45 (Pty) Ltd, the Court noted that the franchisee had raised the argument that the franchise agreement was null and void as the requirement of the CPA had not been complied with. However, in the end result, the Court did not decide the point because it found that the agreement was null and void for other reasons.

In a recent judgment, published on 5 February 2026, The Lemon Tree (Pty) Ltd & Others v Shift Espresso Bar Holdings (Pty) Ltd, the Western Cape High Court was again asked to deal with an argument that the franchise agreement between the parties was "unenforceable for non-compliance with the CPA and thus void or voidable". In that case, the Court took a step towards ruling on the issue, but stopped short of an unequivocal pronouncement.

The Court in The Lemon Tree did not explicitly address the wording of the agreement between the parties to answer the question. Instead, it referred in passing, and with apparent approval, to the 2008 decision of the Natal High Court in Pratsch t/a Caltex Mooi River v Rasmussen. In that case, the Court, faced with a contract that had been concluded in contravention of the regulations in terms of the Petroleum Products Act, stated: "Invalidity cannot simply in all instances be read into a statutory prohibition, where this was not stipulated by the legislature, and where it is not required by necessary implication to prevent frustration of the object sought to be achieved by the legislation".

A party who has been induced to enter into a contract by the other party's misrepresentation of an existing fact is entitled to rescind (or resile from) the contract provided the misrepresentation was material, was intended to induce the person to whom it was made to enter into the contract, and did so induce that person to conclude the contract. Unless a misrepresentation is material, or in respect of a material fact, it will not justify the rescission of the contract.

Put another way, it would be surprising if the law were to permit a party to rescind a contract merely because the party had been the victim of a misrepresentation on a matter of minor importance. Put another way, the misrepresentation (non-disclosure) must have factually induced the contract.

The Court in The Lemon Tree did not explicitly state that the omission from a franchise agreement of information required by the CPA did or did not render the agreement void or voidable. However, the fact that, immediately after referring to the Pratsch judgment above, the Court set out in detail the effect of a misrepresentation on a contract, seems to lead to the conclusion that the omission of prescribed information will result in the contract being void or voidable only where the omission amounts to a misrepresentation of a material fact, and induced the party who was misled to enter into the agreement.