Why a Members’ Agreement is Important for Your Business

A Members’ Agreement is also commonly referred to as an Association Agreement. It is a contract between the members of a close corporation, intended to set out the members’ roles and responsibilities. Is an Association Agreement a legal requirement? No. Close corporation members are not legally required to sign one. But if a CC has two or more members then a Members’ Agreement is highly recommended. A Members’ Agreement helps the members to define their respective roles in the CC, and sets out dispute resolution processes in the event that there is a dispute between the members. A Members’ Agreement helps to clarify members’ rights and obligations and can serve as an invaluable tool in the running of the business. By setting out expectations in writing the members know what is expected of them, and understand the consequences of breaching their duties as members. This often means that conflict can be avoided altogether, and any disputes can be diffused before they become a major issue.

In South Africa the close corporation is being phased out, and you can no longer register a CC with CIPC. Is a Members’ Agreement still valid? Yes, it is. While you can’t register a new close corporation, there are still thousands of close corporations operating their businesses throughout South Africa. And it is still possible to buy and sell members’ interest in a close corporation and register the change of membership with Cipro. We typically find members signing Members’ Agreement with new members, after there has been a sale of members’ interest. But an Association Agreement can be signed by the members at any stage. We recommend that it’s signed before any conflict or dispute arises!

Some of the key issues that a Members’ Agreement covers include:

• Agreement on the close corporation’s registration requirements.
• Members’ loan accounts and whether interest will accrue.
• The distribution of profit to members.
• Setting out decision-making processes, including members’ meetings and notice requirements.
• Limitations on what members, including majority members, can do to bind the close corporation without obtaining unanimous consent of all the members.
• The process to be followed if a member wants to sell their members’ interest.
• Valuation of the members’ interest, eg. in the event of death of a member or forced sale of a members’ interest.
• Forced sales, eg. if a member commits a material breach and is forced to sell their equity.
• Conflict resolution.
• Confidentiality obligations.

An Association Agreement can be used to clarify and agree on any other issues that the members feel are sufficiently important. The template Association Agreement on Agreements Online has been compiled with simplicity and ease-of-use in mind, so that even close corporation members without any legal experience are able to understand the terms and adapt the clauses to their specific requirements.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.