This blog was co-authored by Zahraa Amod-Carim
In May 2022, the Eastern Cape High Court handed down a judgment that invalidated a shareholders agreement between a private entity and its respective shareholders. Five medical doctors and shareholders challenged the hospital in respect of a new shareholders agreement put into effect without their signed consent required by a non-variation clause in the original contract The claimants requested the court to declare the agreement invalid and to interdict the company from compelling the plaintiffs to dispose of their shares on the basis of the new agreement.
A shareholders agreement was entered into between the parties in August 1996. In 2002 a new agreement had been drafted and discussed at various board meetings. The dispute brought before the court focused on whether the 2002 agreement validly replaced or amended the 1996 agreement or not. This depended on whether the shareholders had consented to the terms of this new agreement.
According to clause 7 of the 1996 agreement, ‘no variation of this agreement shall be valid unless reduced to writing and signed by all shareholders’. The claimants relied on this clause as they had no recollection of signing the new shareholders agreement or denied doing so. They argued that the signatures relied on by the defence could have been in respect of an attendance register or something similar.
The company pleaded that the claimants were estopped from disputing the validity of the most recent agreement due to new doctors being appointed as shareholders in line with the 2002 agreement. According to the 2002 agreement, certain clauses required a shareholder to sell their shares due to personal circumstances such as retirement, relocation or death as well as where the board of directors found a shareholder incapable of holding such a position. These clauses, that varied the previous 1996 version, were not agreed nor consented to according to the claimants in this matter. Therefore, they argued that the 2002 agreement should be declared invalid as the variation had not been in writing and signed by all shareholders.
According to the legal Shifren principle, an amendment or cancellation of any contract subject to a non-variation must be in writing. The company argued that the shareholders should be legally bound to the agreement unless it was induced by fraud or justifiable error. According to consistent case law, the Shifren principle binds the contracting parties by the entrenchment clause under their written agreement to the effect that no variation is binding unless agreed to in writing and signed by both parties.
Although the defendant relied on estoppel to prevent the plaintiffs from disputing the validity of the agreement, the case law has explained that estoppel to circumvent the Shifren principle should not be permitted.
The court concluded that the company failed to prove that the agreement was presented to the shareholders and signed as alleged. The judgment declared the 2002 Shareholders agreement invalid and of no force or effect from inception and was set aside. The signature page provided no indication as to what had been signed, the place and the signatory’s capacity. Anyone relying on a written amendment to an agreement will need evidence that all parties signed with the intention to contract. There is nothing better than a complete agreement bearing all the required signatures, in counterparts if necessary. This should be taken into consideration when drafting and executing a written agreement to ensure that the validity of such an agreement cannot be disputed.