Advice and Opinion

Close Corporations Should Have A Comprehensive Members Agreement

Over the last 30 years, many small business owners chose to make their organisations closed corporations, the benefits of this being that no independent audit is required by a CC and in general the legislation that applies to CCs is less onerous. However, says Ian Teague of the Cape legal firm Gunston Attorneys, CCs very often do not have an Association Agreement to clarify the rights and responsibilities of members in the same way that companies normally do by way of a Shareholders Agreement. There may well, for example, be a lack of clarity on how each member’s share is valued, how many votes it entitles him to, how many votes are needed to pass a resolution and what is required from each member on a day-to-day basis.

In the absence of such agreements, said Teague, it is quite common to find that serious arguments arise between members several years after a CC was set up, and on occasion these can only be settled in court.

“Anyone working regularly with CCs,” said Teague, “will have come to realise that it is essential at the outset to draw up an agreement which spells out exactly how some of the difficult issues will be dealt with and, needless to say, such documents often have to be thoroughly comprehensive so that no loopholes are left.”

Asked to give an example of the sort of disagreements that can arise, Teague quoted a case in which he has been involved where one member of a CC became completely unwilling to involve himself in the day-to-day business of a CC, yet demanded a large monthly salary, and on occasion, concluded agreements on behalf of the CC without the consent of the other members. There was, he said, no Association Agreement and such hostility between the members that it took considerable effort and negotiation to resolve the situation.