By Dylan Olivier / Associate Designate / Mooney Ford Attorneys

A company owned by two equal shareholders often begins as a venture built on trust. Both contribute capital. Both participate in management. Both expect to benefit equally.

The difficulty arises when the relationship breaks down. In a 50/50 structure, neither shareholder has control. Ordinary resolutions require more than 50 percent support in terms of section 65(7) of the Companies Act 71 of 2008 (“the Act”).

In practical terms, this means nothing moves without agreement. If both shareholders are also directors, the paralysis often extends to board level. The business can become effectively frozen.

South African law recognises that such deadlocks occur. The real question is not whether there is a problem. It is how the problem should be resolved.

In most cases, the realistic options narrow to two primary routes. One shareholder buys out the other. Alternatively, the company is wound up on the just and equitable ground. Each path carries distinct legal and commercial consequences.

 

The Internal Buyout: Separation Without Destruction

The most commercially sensible solution, where possible, is that one shareholder purchases the other’s 50 percent interest.

Legally, this is straightforward. The parties conclude a written share sale agreement. The company updates its securities register in terms of section 50. If the company itself repurchases the shares under section 48 of the Act, it must satisfy the solvency and liquidity test in section 4 of the Act.

If one shareholder buys personally, that solvency test does not apply, but funding becomes a practical issue.

The real dispute almost always centres on valuation.

There is no single correct method of valuing shares in a private company. Accountants may value the business on a net asset basis, an earnings multiple, or a discounted cash flow model. If the shareholders’ agreement contains a valuation formula, that will usually govern. If there is no pre agreed mechanism, an independent chartered accountant is commonly appointed to determine fair value.

In a 50/50 company, neither party has control. This matters because valuation debates sometimes involve so called minority discounts or control premiums. In a deadlock situation, courts are generally reluctant to apply punitive discounts when fairness is being assessed, particularly where the company operated as what the courts describe as a quasi-partnership.

The advantages of an internal buyout are obvious. The business survives. Staff and contracts remain intact. The value of goodwill is preserved. The dispute is contained.

The disadvantages are equally real. One shareholder must raise funding. The valuation process can itself become adversarial. If the relationship has completely collapsed, trust in a jointly appointed valuer may be low. Negotiations can stall indefinitely.

Where the parties are commercially rational and the business is profitable, a buyout is usually the least destructive solution. It separates the individuals without dismantling the enterprise.

 

Voluntary Liquidation: Ending the Business Itself

If agreement cannot be reached and deadlock renders the company dysfunctional, liquidation becomes a legal option.

Section 81(1)(d)(iii) of the Act allows a court to wind up a solvent company on the just and equitable ground; and deadlock between equal shareholders has long been recognised as such a ground.

It must be noted that a Liquidation order is not granted lightly. Courts examine whether the company can realistically continue operating and whether a less drastic remedy is available. Winding up is considered a remedy of last resort.

If granted, the consequences are severe. A liquidator is appointed. The company ceases trading except for the purpose of winding up. Assets are sold. Creditors are paid. Any surplus is distributed to shareholders according to their shareholding. In a 50/50 structure, that surplus is divided equally.

The perceived fairness of liquidation lies in its finality. No one has to fund a buyout. No one is forced to remain in business with the other. The assets are converted into cash and distributed.

The commercial downside is significant. Liquidation often destroys value. Assets may be realised below market worth. Goodwill and ongoing contracts may evaporate. Employees lose employment. A profitable business can be reduced to a collection of saleable assets.

For that reason, liquidation is frequently used as strategic pressure rather than a genuinely desired outcome.

 

Choosing the Rational Course

In practice, the optimal solution depends on three variables.

First, is the company solvent and profitable. If it is healthy, liquidation is economically irrational unless the relationship is beyond salvage and no funding solution exists.

Second, can one shareholder realistically finance a buyout. If funding is available, separation without destruction is usually preferable.

Third, has one party behaved unfairly. If so, a section 163 application may produce a court ordered buyout at a court supervised valuation, avoiding the waste of liquidation.

The law does not treat 50/50 companies as indestructible partnerships. Nor does it allow one shareholder to hold the other hostage indefinitely. Where agreement fails, courts intervene either to separate the parties or to end the company altogether.

The practical reality is that the earlier legal advice is obtained, the greater the chance of preserving value. Once trust collapses entirely, positions harden, and liquidation becomes increasingly likely.

A 50/50 structure offers equality. It does not offer an automatic escape mechanism. When deadlock arises, the decision is ultimately between dividing the business or dissolving it. The legal framework exists to achieve either outcome. The strategic choice lies in selecting the path that minimises financial destruction while restoring certainty.