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• • 1. Introduction

    As a member of a Close Corporation you should understand the importance of having an association agreement in place. This type
    of agreement regulates the relationship between the members of a Close Corporation and is generally entered into at the beginning
    stages of the relationship.
    
    Having an association agreement is not compulsory but it may prevent disputes and conflicts which can arise between the
    members of the Corporation in the future.
    
    

• • 2. The content of an association agreement

    • An association agreement provides the following information:
      • the rights, obligations and duties of each member of the Close Corporation;
      
      • the percentage of membership of the Close Corporation that each member has;
      
      • the authority and restrictions of the members;
      
      • the members’ voting rights;
      
      • provision for the exit of a member from the Corporation or the death of a member, and how his/her shares will be disposed of;
      
      • provision for a member’s interest in the event of deregistration/ sale of the Corporation;
      
      • the association agreement should contain a clause for a sale- and-purchase agreement;
      
      • provision for members to take policies on each other’s lives as a contingency for the exit/death of a member;
      
      • the agreement must set out the dispute resolution route to be followed in the event of a conflict between the members;
      
      • the agreement should set out when payment will be made to the members;
      
      • the agreement should provide circumstances which dictate when a member is obliged to resign, and circumstances when a
      new member is allowed into the Close Corporation.
      
      

• 3. The benefits of an association agreement

  • In terms of the Companies Act 71 of 2008, no new Close Corporations may be registered, and existing Close Corporations
    can elect to convert to a Company or remain as a Corporation. Should the members decide to remain as a Close Corporation
    then the benefits below should be taken into consideration when deciding on having an association agreement drawn up:
    
    3.1 association agreements are fully compliant with the Close Corporations Amendment Act 26 of 1997;
    
    3.2 personal liability of members against claims is controlled and minimized;
    
    3.3 accountability requirements of the Act are provided for in the agreement;
    
    3.4 assurance requirements of the Act are met;
    
    3.5 members enjoy the Business Judgement Rule protection (a legal principle that protects the members from personal
    liability to the Close Corporation for loss incurred in business transactions that are within their power to make when
    sufficient evidence demonstrates that the transactions were made in good faith);
    
    3.6 the agreement will identify all cases requiring solvency and liquidity tests to be applied;
    
    3.7 a member’s authority to represent the Close Corporation is clearly identified;
    
    3.8 members are forewarned of sanctions applicable to reckless or fraudulent business activities in the Close Corporation.
    
    

• 4. Format of an association agreement

  • It must be noted that because an association agreement is not compulsory, there is no prescribed manner relating to format.
    However, as with other agreements, an association agreement must be signed by all the members involved, in the presence of
    witnesses, and initialled on each page.
    
    It is important that all the members have a signed copy of the agreement and the original agreement should be kept with the
    Close Corporation’s attorney, and a copy thereof should be kept at the registered office of the Close Corporation.
    New members of the Close Corporation will be bound by an existing association agreement as though the new members had
    signed the agreement themselves. An association agreement will generally follow the sequence below:
    
    • interpretation;
    • introduction;
    • incorporation of the corporation;
    • management of the corporation;
    • valuation;
    • life insurance;
    • transfer of member’s interest;
    • fraudulent activity;
    • disputes and resolution;
    • addresses and notices;
    • breach of agreement;
    • good faith;
    • confidentiality;
    • general.
    
    
    

• 5. Transfer of deceased member’s interest

  • Where a member of a Close Corporation dies the disposal of the member’s interest should be provided for in the association
    agreement. Should the member make provision in his/her will for the interest to devolve upon his/her heir(s), the transfer of such interest in the
    Close Corporation is effected by the executor appointed in the estate of the deceased member.
    
    Section 35 of the Close Corporation Act 69 of 1984 provides for the above transfer as follows:
    
    (a)“…the deceased member’s interest in the corporation to be transferred to a person who qualifies for membership of a
    corporation in terms of Section 29 of the above Act and is entitled thereto as legatee or heir or under a redistribution agreement, if
    the remaining member or members of the corporation consent to the transfer of the member’s interest to such person”; or
    
    (b) “if any consent referred to in paragraph a is not given within 28 days after it is requested by the executor, sell the deceased
    member’s interest to the corporation to any other remaining member or members of the corporation in proportion to the
    interests of those members in the corporation or as they may otherwise agree upon”; or
    
    (c) “to any other person who qualifies for membership of a corporation in terms of Section 29.”
    
    

• 6. Checklist for an association agreement

  • Section 44 of the Close Corporations Act regulates association agreements entered into by members of a Close Corporation.
    
    Where there are two or more members, it is advisable for them to enter into an association agreement that provides for:
    
    6.1 participation of every member, or selected members, in the carrying on of the business (section 46(b));
    
    6.2 power of members to represent the Close Corporation in the carrying on of business, such as:
    • a change in the principal business carried on;
    • disposal of the whole or substantially the whole
    undertaking; • disposal of all, or the greater portion of, the assets;
    • an acquisition or disposal of immovable property;
    
    6.3 resolving the differences among members as to matters connected to the business (section 46(c));
    
    6.4 voting rights at meetings (section 46(d));
    
    6.5 the furnishing of securities by members;
    
    6.6 financial reporting requirements.
    
    
    
    
    

• 7. Conclusion

  • Even though it is not compulsory to have an association agreement it will make life much simpler to have one in place. The
    agreement should generally be drafted by an attorney in order to ensure its validity, and that it is drafted particularly for each Close
    Corporation individually.
    
    An association agreement is the most important document for a Close Corporation and should therefore be well drafted and
    contain all the necessary clauses in compliance with the law.