The memorandum of incorporation under the Companies Act 71 of 2008
28 March 2013
One of the most important changes brought about by the new Companies Act (“the Act”) is the creation of a new founding document for companies, called a Memorandum of Incorporation (the “MOI”), which combines the current memorandum of association and articles of association of a South African company into one document. The MOI stipulates the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company and other related matters.
The Act provides that:
The Act allows companies to file a notice of amendment of its current founding documents to bring it in harmony with the Act by no later than the 30th of April 2013 to avoid certain automatic consequences discussed below. The Act further provides that companies have the following options during the period between the 1st of May 2011 and the 30th of April 2013 (called the “Interim Period”):
- the MOI may include matters not addressed in the Act and alterations of alterable provisions;
- the MOI must be consistent with the Act and is void to the extent that it contravenes or is inconsistent with the Act; and
- any provision of a shareholders’ agreement that is inconsistent with the Act or the MOI is void to the extent of the inconsistency.
There are many wide exceptions to the aforementioned rule as stated in Schedule 5 and these exceptions will have immediate effect on the Interim Period (i.e. they will override the MOI and shareholders’ agreement, even during the Interim Period), these include (amongst others) provisions of the Act regulating:
- in the event of a conflict between the pre-existing company’s founding documents, being its memorandum and articles of association (or ‘MOI’ as it is called under the Act) and the Act, the existing MOI will prevail, except to the extent that Schedule 5 in the Act provides otherwise; and
- in the event of a conflict between a shareholders’ agreement and the pre-existing company’s existing MOI or the Act, the shareholders’ agreement prevails (in our view this is also subject to the exceptions set forth in Schedule 5).
However, it should be noted that some of the aforementioned provisions which will become immediately effective in terms of Schedule 5 can be altered in the MOI.
- the conversion from par value shares to no par value shares;
- the approvals required for any distribution, financial assistance, insider share issues, or options;
- the duties, conduct and liability of directors;
- the rights of shareholders to receive notices and access information;
- meetings of shareholders and directors and the adoption of resolutions;
- fundamental transactions and regulation by the Takeover Regulation Panel; and
- business rescues.
Insofar as a company’s existing founding documents and shareholders’ agreement may be in harmony with the Act, it would not be necessary to amend or replace such existing documents. However, in our experience it is highly unlikely that a company’s existing founding documents and/or shareholders’ agreement would be in complete compliance.
Should a company fail to amend its founding documents in line with the Act, the result will be that after the 30th of April 2013 those provisions of its founding documents which are not compliant would be overridden by the Act and its shareholders’ agreement will be void to the extent of any inconsistency.
It is therefore very important for all companies to conduct a review of its current founding documents and shareholders’ agreements in order to establish the extent of the inconsistencies between them and the Act in order to be able to bring it in line with the new Act as soon as possible. Failing to do so could result in some of the companies’ actions/decisions being open to attack for not having been implemented legally. Depending on the nature of the non-compliance it may potentially be very costly for a company to recover from such a mistake.
The good news is that by adopting a new suitably drafted MOI, a company may be able to retain most of its previous “internal mechanisms” and administrative procedures by amending the alterable provisions of the Act to suit its particular needs.
At the moment the Companies and Intellectual Property Commission (“CIPC”) is already under huge pressure to register the large number of applications by companies to adopt new MOI’s in anticipation of the Implementation Date and currently the registration process can take up to two or more months to complete. It is therefore advisable to commence the process to replace the company’s current memorandum and articles of association with a new MOI which is compliant with the Act sooner rather than later to ensure timeous compliance by the 30th of April 2013.
Lastly, once a company’s new MOI has been drafted, it may be prudent to draft a short addendum to the existing shareholders’ agreement to record in writing those provisions of the shareholders’ agreement which will no longer apply due to them being in conflict with the MOI and/or the Act and/or which are no longer applicable under the new dispensation.
Please note that the legal topics informally discussed here are general discussions of certain aspects and therefore certainly not intended as legal advice. We look forward to discussing your particular case with you.