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Association clause

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Association Clause

An association clause detailing the creation of a company and issuing shares in terms of a memorandum of association.

The Association Agreement basically sets out all the rights and obligations of each member. It sets out what percentage of membership of the Close Corporation each member has, what each member can and cannot do, can and cannot get, voting rights, basically everything that regulates the agreement between the members and the Close Corporation.

The Association Agreement is a lot like a Partnership Agreement. Members in a Close Corporation has an interest in the Close Corporation and this interest has a value. In a Partnership each partner owns a share of the assets and liabilities of the Partnership’s assets.

The Association Agreement can make provision for basically anything that the members want it to make provision for and each Association Agreement is drafted particularly for each Close Corporation individually. It is strongly advised against finding examples on the Internet or elsewhere and then “cut and paste”. There are certain requirements that must be in the Association Agreement to make it a useful and valid agreement.

One of the most important issues that must be dealt with in an Association Agreement, is what must happen when a member wants to exit the Close Corporation and dispose of his/her shares. Equally this will apply in the case of the death of a member. Also, the Agreement must determine what must happen to the member’s interest when the members decide to close down (deregister) the Close Corporation or sell it.

With “what must happen with a member’s interest” it is meant that, first of all, the value of the interest must be determined; the Agreement must set out how that value will be determined, and when exactly that value will be determined (for example, on the day of resignation; the day before death) and by whom the value will be determined.

There should be a clause for a Buy-and-Sell Agreement or a separate Buy-and-Sell Agreement in place and the members should take policies on each other’s lives to make provision for when a member exits the Close Corporation – either by resignation or death. (The Association Agreement will take preference over a Buy-and-Sell Agreement so make sure that there is not a clash between the two agreements).

The Association Agreement must set out exactly what will happen if there is a difference between the members in making a decision and the Agreement should indicate what route must be followed in such an instance: either mediation or arbitration or such like.

Members nearly always lend money to the Close Corporation to start or fund the Close Corporation and there will nearly always be loan accounts owing to members. The Association Agreement must very clearly set out how much a loan account can be; how and when it will be repaid by the Close Corporation; what must happen with the loan account when a member exists. Remember that if a member dies, his/her loan account is an asset in his/her estate and the executor will call up the loan.

The Close Corporation must then be in a position to repay such a loan. It is therefore suggest that a policy be taken out by the Close Corporation to enable it to pay out loans to members should they wish to exit or die before the loan is repaid.

If a new member joins the Close Corporation, the Close Corporation does not cease to exist as is the case with a Partnership. The new member is, however, bound by the Association Agreement if it was signed before his/her entry as a member and even though he/she did not sign the Association Agreement.

The Association Agreement must also state what the duties of each member is; what each member can do and cannot do. For example, Members X and Y will have signing power to the bank account but not member’s D and E.

A very important section in the Association Agreement is also to set out when payment will be made to members. For example, profits will be paid out quarterly or yearly or whatever the case may be.

The Association Agreement should also set out under what circumstances a member is obliged to resign (for example, if he/she is found guilty of a crime) and under what circumstances a new member can be allowed in (for example, if a specialist’s expertise is required.)

There are certain things that are regulated by the Close Corporation Act 69 of 1984 and which cannot be changed by an Association Agreement.

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