It is important to note that the effect of a contract does not depend on the name given to it.

Many people assume that the tittle of the contract will determine the relationship between the parties however it depends on the manner in which the contract is drawn.

What is important is to establish:

1.     what the nature of a contract is;

2.     the right and obligations created under the contract;

3.     the duration of the contract.

Rights are benefits you are receiving under the contract whereas Obligations are the responsibilities you have to perform under the contract.

Let's take a look at these types of two contracts:

(1)   PARTNERSHIP AGREEMENTS are an in writing or oral agreement or may be implied by contact of partners. In general, all partners must participate in the management of the business and share in the net profits of the partnership.

In South African Law a partnership does not have a separate legal personality, that making the partners liable jointly and severally for the debts and liabilities of the partnership. The debts of the partnership are the debts of the partners.

A partnership does not need to have a perpetual succession, any change in the members of the partnership, whether due to death, insolvency, resignation or retirement of a partner, results in the automatic dissolution of the partnership.

(2)   SHAREHOLDERS AGREEMENTS are entered into by Shareholders a company and it should be consistent with the Companies Act of 2008. Unlike an MOI a Shareholder’s Agreement does not need to be filled the Commission (CIPC).

A company has a separate legal personality distinct from its Shareholders or Members. As a legal personality the company is the owner of its business and not the Shareholders, likewise the profits made by the company belongs to the company and not its Shareholders. Holding of shares in a company does not entitle the Shareholder to ownership or part ownership of its assets. From this it follows that the debts and the liabilities of a company of the company itself and not of its Shareholders.

Shareholder Agreements should have an exit clause that will set out how Shareholders are to be bought out, how the shares should be listed for sale and the valuation of the shares.

There should also be pre-emption rights where the Shareholder disposing of his/her shares must first offer them to the other Shareholders, stating the price and the terms of payment required. Only once the other Shareholders decline the offer may the Shareholder then sell its shares to a third party.

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