The importance of aligning the shareholders agreement of a company with its MOI

The Memorandum of Incorporation (“MOI”) is the document that sets outs the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and certain other matters which the new Companies Act, 71 of 2008 does not address. It is binding between the company and each shareholder, its shareholders, and between the company and certain other persons, such as directors, in the exercise of their functions within the company. The documents by which a pre-existing company was structured and governed in terms of the old Companies Act, 61 of 1973 (i.e. its memorandum and articles of association) will be its MOI, if the company did not adopt a new MOI prior to 1 May 2013.

In terms of the old Companies Act, if a shareholders agreement was executed it could override the articles of association of the company. Now, in terms of the new Companies Act, the MOI will take precedence over an agreement concluded between shareholders. Moreover, a shareholders agreement will be void to the extent that it is inconsistent with the new Companies Act or the MOI.

Companies are faced with the challenge of keeping sensitive shareholder matters private whilst ensuring that at least the minimum information required by the new Companies Act is contained in their MOI’s. It is precisely for this reason that it is essential for a company to ensure that any agreement between its shareholders dovetails with its MOI so as to prevent contradiction between these documents.

In practice, problems frequently arise in instances in which the MOI and shareholders agreement of a Company do not speak to one other.

Previously, the right of shareholders to appoint directors would normally be dealt with in a shareholders agreement. However, in terms of the new Companies Act, in the case of a profit company other than a state owned company, the MOI must provide for the election by shareholders of at least 50% of the directors. If the MOI does not specifically provide for the right of a shareholder to appoint a director then that specific shareholder will not have such right.

Shareholders agreements often require certain types of matters to be approved by shareholders in terms of a special resolution. However, the new Companies Act expressly lists certain matters that must be approved by special resolution and the standard template form MOI’s often state that only those matters are required to be approved by special resolution. This may give rise to instances where approval in terms of a special resolution is no longer required for those matters listed in the shareholders agreement which have not been incorporated into the MOI.

The new Companies Act contains certain alterable and unalterable provisions. Alterable provisions may only be altered in terms of an MOI and not by way of a shareholders agreement. In the absence of the alteration of a provision in the Act, the default provision will apply. It is necessary that any restriction on the powers of directors contained in the shareholders agreement be incorporated into the MOI, to the extent permissible.
It is important that a company should check with a suitably qualified commercial attorney that its shareholders agreement aligns with its MOI and the new Companies Act and take steps to effect any amendments that may be required. This is necessary in order to avoid a situation where a conflict between these documents renders the relevant provision of the shareholders agreement of the company unenforceable.


Paul Truter and Amy Jones
Truter Jones Inc.

 

This article does not constitute legal advice and is provided for information only. The information set out in this article is subject to change without notice. Copyright in this article vests in Truter Jones Inc and it may not be redistributed or copied without the written consent of Truter Jones Inc.