NEW COMPANIES ACT
With the enactment of the new Companies Act (the Act) there is an obligation on all existing companies to ensure that their governing documents are compliant with the Act. Under the 1973 Act a company’s governing documents were the Memorandum and Articles of Association and in most cases a shareholders’ agreement which ultimately prevailed over the Memorandum and Articles of Association.
Under the new Act, a single document, the Memorandum of Incorporation (MOI) replaces the two part Memorandum and Articles of Association. The new Act states that the MOI must be consistent with Act and is void to the extent that it contravenes or is inconsistent with the Act. In terms of section 15 (2) of the Act the MOI may include any provisions (i) dealing with a matter that the Act does not address (ii) altering the effect of any alterable provision of the Act or (iii) imposing on the Company a higher standard greater restriction, longer period of time or any similarly more onerous requirement than would otherwise apply to the company in terms of an unalterable provision. It is important to note that section 15 (d) states that the MOI must not include any provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance or effect of an unalterable provisions of the Act.
The Act provides all companies with a two year grace period ending on 30 April 2013 within which to amend their current Memorandum and Articles of Association in compliance with the Act. During this grace period your current Memorandum and Articles of Association will be of full force and effect and will prevail over the Act. However Schedule 5 of the Act contains a number of exceptions and provides that the Act will prevail over a pre-existing Memorandum and Articles of Association during this grace period in respect of any clause relating to:
the duties, conduct, and liability of directors;
- rights in terms of the Act of shareholders to receive any notice or have access to any information
- meetings of shareholders or directors and adoption of resolutions; and
- fundamental transactions, takeovers and offers, except to the extent that they exempted by or in terms of Chapter 5 of the Act.
In the event that a company does not amend its Memorandum and Articles of Association in compliance with the Act by the cut off date your existing Memorandum and Articles of Association will be deemed to be your MOI and all provisions that are inconsistent with the Act will be void and the default provisions of the Act will apply.
Section 15(7) of the Act provides that all shareholders’ agreements must be consistent with company’s MOI and the Act and the agreement is void to the extent of its inconsistency with either your MOI or the Act. However, as is stated above, the Act allows for a grace period during which time the shareholders agreement in force before the Act came into effect will prevail over the company’s MOI and the Act.
It is important to note that that the provision states that the shareholders agreement will be of full force and effect, for a period of two years from the effective date, or until changed by the parties to the agreement. In this regard, it may be the case that that any change to the shareholders agreement or change in shareholding during this two year grace period may result in the company losing its two year grace period thereby rendering any provisions that are inconsistent with the MOI or the Act invalid.
Submission of revised MOI:
In light of the above, we would advise that all companies revise their current governing documents to ensure that their MOI and shareholders agreement are in compliance with the Act.Being that it is highly unlikely that all the provisions of your existing MOI will be consistent with the Act you will need to submit a revised MOI by 30 April 2013.
The Act does allow for the submission of standard form MOI’s (the CoR 15.1A being the Short Standard Form for Private Companies and the CoR 15.1B being the Long Standard Form for Private Companies). These standard form MOI’s have been provided for by the Act to help facilitate the process of amending ones MOI in compliance with Act, however these standard forms are deficient in a number of respects in that the standard form MOI’s do not restrict the transferability of shares which brings with it the risk of having to meet the requirements of a Public Company; the standard form MOI’s do not limit the authority of directors in any way; wording is often vague and confusing and requires a great deal of deference to the Act which itself is not always clear; and most importantly each company is unique in relation to its shareholders and directors with specific requirements relating to authority levels and the rights of shareholders and directors and as such it is highly unlikely that the standard form MOI’s will cater for most companies needs.
Furthermore, if you have a shareholders’ agreement in place, this agreement will ultimately need to be consistent with your MOI and the Act and as such you will have to submit a customized MOI which reflects the provisions of your shareholders agreement as far as possible. In these circumstances your options are twofold:
Effectively your shareholders agreement under the new Act may only deal with matters that are not dealt with by the Act or your MOI and when the shareholders agreement does deal with an aspect that is dealt with by the Act or the MOI, the shareholders agreement and your MOI will have to be consistent and if not the MOI will prevail. As such our advice would be to have all matters not dealt with by the Act in a separate shareholders agreement, these would include provisions relating to pre-emptive rights, loan accounts, internal management, etc. You will then need to submit a revised MOI dealing with all aspects covered under the Act including the amendment of alterable provisions of the Act, director and shareholder meetings, elections in terms of the optional provisions of the Act etc. Being that your shareholders agreement is not open to public scrutiny and does not need to be submitted with CIPC, this way you will be able to keep certain aspect relating to the governance and management of your company confidential.
Scrap your shareholders agreement and have a comprehensive MOI that deals with both matters not covered by the Act and those provisions that in terms of the Act must be dealt with in your MOI. The benefit of following this route is that you will have one comprehensive document which may be more practical than having to refer two separate documents. On the downside this document will be open to the public and may not suite companies that are wanting to keep certain information confidential.
In light of the above and the inherent deficiencies in the standard form MOI’s we would highly recommend that each company review their current shareholders agreements and MOi’s and submit a customized MOI by the cut off date of 30 April 2013 so as to avoid a situation in which the provisions of your current governing documents are declared invalid for non-compliance with the Act