Reality-Checked: Why Your Corporate Paperwork Must Match Practice

Nthabiseng Phako

Starting a business is like assembling a sports team where optimism, skill, and teamwork drive everyone forward. But if roles are not clearly defined and aligned with the game plan, even the best players can clash, turning collaboration into frustration.

In practice, this conundrum is commonly encountered in small to medium-sized businesses, including family enterprises and closely held companies. Over time, the formal legal framework, such as the memorandum of incorporation, directors’ resolutions, securities registers, shareholding records and shareholders’ agreements, can drift away from the day-to-day reality of how the business is actually run.

Directors and shareholders frequently rely on informal agreements, shared decision-making, or mutual understandings that are never documented. Shareholders may also participate in operational decisions, even if their formal role is limited. Problems tend to arise when operational reality no longer aligns with legal form.

Consider a closely held company where one director has formal authority on paper, but a key shareholder is deeply involved in day-to-day operations. Perhaps that shareholder manages clients, approves certain operational decisions, or contributed capital beyond what is formally recorded. Everything may run smoothly, until a conflict arises. When the relationship breaks down, formal titles may no longer reflect reality, and the consequences can be costly.

This is what happened in Ungerer v Ferreira and Others (Case No 4475/2024; [2025] ZAECQBHC 13 (ECGq), delivered on 7 May 2025.

Formally, the first respondent was the sole director, and the applicant held the title of manager. The parties were equal shareholders and had no written shareholders’ agreement. In practice, however, both contributed start-up capital, managed clients together, shared financial decisions, and drew equal profits. When the relationship deteriorated, the first respondent excluded the applicant from bank accounts, emails, and company operations, effectively excluding the applicant from the business.

The court looked beyond the formal titles and considered the substance of the parties’ relationship, including their equal shareholding, shared contributions, joint participation in management and mutual expectations. The court found that the applicant’s legitimate expectations had been frustrated and granted relief under section 163 of the Companies Act 71 of 2008.

Section 163 of the Companies Act provides a statutory remedy for shareholders and directors where the conduct of a company, or a related person, is oppressive, unfairly prejudicial, or unfairly disregards the interests of the applicant.

Importantly, courts have recognised that, in appropriate circumstances, section 163 may protect not only strict legal rights, but also legitimate expectations arising from the manner in which the parties conducted the business. This is particularly relevant in closely held companies or quasi-partnership arrangements, where the relationship between shareholders may be based on trust, mutual participation and shared control.

The message is clear: management should ensure that governance reflects operational reality. Roles, decision-making authority, profit-sharing arrangements, access to resources, and the limits of operational involvement should be properly recorded and regularly reviewed.

Shareholders should also understand that informal involvement and mutual understandings can create enforceable expectations in appropriate circumstances. Ignoring these realities may expose the company and its decision-makers to claims of unfair prejudice or oppression.

While it may seem tedious at the honeymoon stage, clearly documenting roles, responsibilities, operational authority, profit-sharing arrangements, funding contributions, and exit strategies protects the company and its participants.

Courts may look at the substance of the parties’ conduct, but they cannot rewrite history or remove the uncertainty created by poor record-keeping. By aligning legal structures with operational realities, directors and shareholders can reduce unpredictable yet avoidable disputes, protect relationships by setting clear boundaries, and maintain business continuity even when conflicts arise.

As companies evolve, so do their operational practices. When day-to-day operations shift, it is important to update the memorandum of incorporation, shareholders’ agreements, securities registers, directors’ resolutions and other internal governance documents accordingly.

Otherwise, what may appear orderly on paper can quickly become a source of conflict. South African courts may, in appropriate circumstances, look beyond formal structures and consider the operational reality of the business, particularly where a company operates as a quasi-partnership and section 163 relief is sought.

Ensuring that a business’s legal framework accurately reflects how the company actually operates is essential: form must reflect substance. Regularly reviewing and updating these documents is not just good practice; it is critical to protecting the business, its stakeholders and its future.